Announcements Insurance Rating Alerts

GCR affirms Western National SA’s national scale financial strength rating of A(ZA) with a Stable Outlook

Rating Action

Johannesburg, 28 February 2020 – GCR Ratings (“GCR”) has affirmed Western National Insurance Company Limited’s (“Western National SA”) South Africa national scale financial strength (formerly claims paying ability) rating of A(ZA), with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Western National Insurance Company Limited Financial strength National A(ZA) Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Western National SA was placed ‘Under Criteria Observation’. GCR has finalised the review of Western National SA under the Criteria for Rating Insurance Companies, May 2019. As a result, the rating has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

Western National SA’s rating reflects the strengths and weaknesses of Western Group Holdings Limited, as it is viewed to be the core operating entity within the group. In this respect, the rating balances the group’s sound financial profile with a limited business profile.

The group’s earnings are viewed to be positive to the rating, with consistent reductions in the net loss ratio supporting a three year average underwriting margin of 7% (11M F20: 11%). Net earnings have been further supported by realised investment income, with the corresponding average return on net earned premiums equating to 11% (11M F20: 12%). GCR expects earnings to continue to support the rating, with the favourable underwriting trend expected to offset some recent exposure to investment market volatility.

Risk adjusted capitalisation is viewed to be strong and supportive of the rating. GCR Capital Adequacy Requirement coverage has registered above 1.5x over the past two years, and Western National SA has maintained comparatively high regulatory capital metrics, while there are expected to be limited additional capital requirements at other group subsidiaries. Capitalisation is likely to be maintained at a strong level over the outlook horizon, as sound earnings and high profit retention are expected to offset high growth projections. Liquidity is assessed to be moderately strong, with stressed financial asset coverage of technical liabilities registering between 1.5x and 2x and coverage of operational costs equating to around 10 months. Liquidity is expected to continue to be supported by sound operational cash flow generation and conservative investment allocation.

The above factors are partly offset by the limited competitive position, given low market shares in the South African and Namibian insurance sectors, and the start-up phase of the Botswana businesses. Premium diversification is viewed to be healthy in terms of line of business spread, although this is partly offset by limited geographic diversification outside of South Africa. The group has reflected a level of success in executing its strategic plans, as evidenced by the strong growth achieved over the review period, which has coincided with a strengthening in underwriting profitability. This, together with potential for enhanced diversification through expansion into Botswana, may support a more positive assessment of the business profile if sustained over the medium term.

Outlook Statement

GCR expects premium growth to remain strong (between 15% and 20%), supported by continued growth in the commercial lines segment. This is expected to alleviate cost increases associated with the expansionary phase, and together with well contained claims is likely to offset a moderation in investment returns, supporting earnings at relatively strong and stable levels. As a result, solvency strength is expected to be maintained, with internal capital generation being sufficient to cater for high projected growth over the outlook horizon.

Rating triggers

Potential for positive rating action may be limited by the consideration of group dynamics given the shareholding structure. Negative rating action could follow if capitalisation and/or liquidity reduce below expectations.

Analytical Contacts

Primary analyst Susan Hawthorne Senior Analyst
Johannesburg, ZA SusanH@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Head of Group Ratings
Johannesburg, ZA MatthewP@ GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, January 2020
GCR Insurance Sector Risk Scores, January 2020

Ratings History

Western National Insurance Company Limited
Rating class Review Rating Scale Rating Outlook Date
Claims paying ability Initial National A-(ZA) Stable April 2015
Claims paying ability Last National A(ZA) Stable May 2018

Risk Score Summary

Risk scores
Operating environment 15.75
Country risk score 7.50
Sector risk score 8.25
Business profile (2.75)
Competitive position (2.25)
Premium diversification (0.50)
Management and governance 0.00
Financial profile 1.75
Earnings 0.50
Capitalisation 1.00
Liquidity 0.25
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 14.75

Glossary

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Capital The sum of money that is invested to generate proceeds.
Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Cash Funds that can be readily spent or used to meet current obligations.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Earned Premium That part of the premium applicable to the expired part of the policy period.
Investment Income The income generated by a company’s portfolio of investments.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

Salient Points of Accorded Rating

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Western National Insurance Company Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Western National Insurance Company Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Western National Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • Group and company audited financial results as at 28 February 2019;
  • Four years of comparative group audited financial statements to 28 February;
  • Unaudited year to date management accounts to 31 January 2020;
  • A summary of the current reinsurance programme;
  • Other relevant documents.
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