Johannesburg, 07 Mar 2014 — Global Credit Ratings has today downgraded the national scale claims paying ability rating of NEM Insurance Plc to A-(NG); with the outlook accorded as Stable. The rating(s) are valid until 10/2014.
Global Credit Ratings has accorded the above credit rating(s) on NEM Insurance Plc (“NEM”) based on the following key criteria:
NEM has achieved an accelerated premium growth trajectory over the review period, cementing the insurer’s strong market position within the highly fragmented industry. However, capital adequacy has weakened significantly following the restatement of the financial statements under IFRS. In this regard, international solvency has more than halved relative to measures at the start of the review period, and is not expected to recover to historical levels over the rating horizon. This reduction in capital adequacy has a negative rating impact. Coverage of the minimum regulatory requirement is also viewed to be thin, measuring at just 1.08x.
The insurer is viewed to reflect an aggressive risk appetite, exhibiting a significantly higher retention rate (98%) relative to the industry average (67%). Liquidity is considered adequate relative to operational requirements, with cash and equivalents providing for 5 months of excess average monthly underwriting outflows in F12. Further, liquid assets covered policyholder reserves by 1.1x, exceeding the technically prudent level. However, reserving risk is viewed to be moderately high, albeit improved relative to the historically weak level. NEM has engaged an independent actuary to test its adequacy and it was concluded that technical claims reserves required an additional N83.7m to meet the liability adequacy test while the unexpired premium risk has been fully provided for.
New regulatory guidelines on insurance premium collections and remittances prohibit underwriters to provide policy cover without premium collection. This bodes well for asset quality at an industry level going forward, given the persistently high level of premium receivables and concomitant asset write-downs historically. The stringent execution of the cash and carry policy represents an important factor over the rating horizon.
Positive movement in the rating or outlook could develop upon an improvement of the risk adjusted solvency level, as well as a strengthening in profitability. Also, the insurer’s ability to improve on the current statutory solvency coverage, and/or cutting down on risk appetite to lower capital risk may be a key consideration. Negative movement/s on the other hand may follow any further decline in capital that will impact on solvency metrics and/or a significant decline in profitability.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Aug/2009)|
|Claims paying ability: A-(NG)|
|Last rating (Sep/2012)|
|Claims paying ability: A(NG)|
|+234 1 462 2545|
|Sector Head: Insurance|
|+27 11 784 1771|
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
NEM Insurance Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to NEM Insurance Plc with no contestation of the rating.
The information received from NEM Insurance Plc and other reliable third parties to accord the credit rating included the 2012 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, full year detailed budgeted financial statements, unaudited year to date management accounts to September 2013, the current year reinsurance cover notes, reserving methodologies, and other related rating information.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.