Announcements Insurance Rating Alerts

GCR revises NCA Re’s financial strength ratings to BB(CI) and CCC+ on Criteria Change; Outlook Negative.

Rating Action

Johannesburg, 18 December 2019 – GCR Ratings (“GCR”) has revised Nouvelle Compagnie Africaine de Réassurances’ (“NCA Re”) national scale financial strength (formerly claims paying ability) rating to BB(CI), from BBB-(CI), with a Negative Outlook. Furthermore, the international scale financial strength (formerly claims paying ability) rating has been revised to CCC+, from B, with a Negative Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Nouvelle Compagnie Africaine de Réassurances Financial strength National BB(CI) Negative Outlook
Financial strength International CCC+ Negative Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for NCA Re were placed ‘Under Criteria Observation’. GCR finalised the review for NCA Re under the released Criteria for Rating Insurance Companies, May 2019. As a result, the ratings for NCA Re have been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

NCA Re’s ratings reflect significant credit profile moderation due to very high exposure to aged premium receivables. Substantial balances of premium receivables aged above 180 days resulted in the GCR capital adequacy ratio measuring at very low levels, overshadowing an otherwise sound business profile. Furthermore, fairly sound earnings and intermediate liquidity metrics are tempered by working capital management and premium quality concerns. GCR is cognisant of management efforts to mitigate capital erosion by aged premiums through capital injections from new and existing shareholders, regulatory lobbying and enhanced credit controls, albeit with challenges likely to be protracted due to their systematic nature. Accordingly, the Negative Outlook reflects potential for further downward rating action, should risk adjusted capitalisation metrics continue to measure below expected levels.

NCA Re’s risk adjusted capitalisation measured within a very weak range, representing a key rating concern. While the nominal capital base registered at XOF11bn at FY18, the full impairment of premium receivables aged above 180 days reduced capital to a level well below concomitant risks. Resultantly, the GCR capital adequacy ratio reduced to a very low range, evidencing high potential for a further lowering of the capitalisation assessment over the rating horizon.

The business model exhibits capacity to generate sound earnings, with both the review period underwriting margin and return on revenue measuring at 8% in FY18. However, GCR notes risk to earnings due to high credit risk, which could persist over the outlook horizon, moderating earnings strength. Furthermore, liquidity metrics are supported by stretched payables (offsetting high receivables), long term borrowings and a conservative asset allocation. In this regard, amounts due to retrocessionnaires increased by XOF2.5bn (offsetting an increase in reinsurance receivables of XOF1.9bn), while liquid assets accounted for 90% of the investment portfolio. Accordingly, liquidity and operational cash coverage metrics equated to 1.4x and 17 months, respectively, reflecting the use of borrowings to finance property investments and delicate working capital management tactics. GCR, however, notes aggregate risks to liquidity due to netting and claims repudiation risk (from high retrocessionnaire balances).

The reinsurer’s business profile balances well-diversified geographic presence with limited product diversification. Gross premiums are spread across three significant markets in the CIMA zone, which are complemented by smaller risk portfolios in multiple markets. However, the product mix is skewed towards property risks, in line with market norms. Going forward, GCR sees high prospects for premium quality concerns to persist, potentially moderating the factor’s assessment.

Outlook Statement

The Negative Outlook reflects GCR’s view that the reinsurer’s risk adjusted capitalisation could remain within the current range or deteriorate further over the rating horizon, due to entrenched premium collection challenges.

Rating triggers

The ratings are unlikely to be upgraded over the short term, although the Outlook could revert to ‘Stable’ on the back of an improvement in risk adjusted capitalisation to expected levels.

Analytical Contacts

Primary analyst
Godfrey Chingono
GodfreyC@GCRratings.com +27 11 784 1771

Yvonne Mujuru

Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Secondary analyst Fleur Ngassa Associate Analyst
Johannesburg, ZA MarlaineN@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@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, June 2019
GCR Insurance Sector Risk Scores, December 2019

Ratings History

NCA Re

Rating class Review Rating scale Rating Outlook Date
Claims paying ability Initial National BBB-(CI) Stable March 2017
Last BBB-(CI) Stable December 2018
Claims paying ability Initial International B Stable March 2017
Last B Stable December 2018

Risk Score Summary

Risk scores NCA Re
Operating environment 6.50
Country risk score 3.75
Sector risk score 2.75
Business profile (0.25)
Competitive position (0.50)
Premium diversification 0.25
Management and governance 0.00
Financial profile 0.75
Earnings 0.50
Capitalisation 0.00
Liquidity 0.25
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 7.00

Glossary

Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Agency An insurance sales office which is directed by an agent, manager, independent agent, or company manager.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capacity The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.
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.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Cash Funds that can be readily spent or used to meet current obligations.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different investments, 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.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Experience A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
Facultative Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.
Financial Flexibility The company’s ability to access additional sources of capital funding.
International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
Interest Money paid for the use of money.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
Investment Income The income generated by a company’s portfolio of investments.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
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. The ability of an insurer to convert its assets into cash to pay claims if necessary. 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.
Loss The happening of the event for which insurance pays.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Net Retention The amount of insurance that a ceding company keeps for its own account and does not reinsure.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
Policyholder The person in actual possession of an insurance policy.
Pool An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Reinstatement The resumption of coverage under a policy, which has lapsed.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Salient Points of Accorded Ratings

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

The credit ratings have been disclosed to Nouvelle Compagnie Africaine de Réassurances. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Nouvelle Compagnie Africaine de Réassurances 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 Nouvelle Compagnie Africaine de Réassurances and other reliable third parties to accord the credit ratings included:

  • Audited financial statements as at 31 December 2018;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2019; and
  • Other relevant documents.
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