Johannesburg, 4th November 2019 – GCR Ratings (“GCR”) has revised NICO General Insurance Company Limited’s (“NICO General Malawi”) national scale financial strength (formerly claims paying ability) rating to AA(MW), from AA-(MW), with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|NICO General Insurance Company Limited||Financial strength||National||AA(MW)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for NICO General Malawi was placed ‘Under Criteria Observation’. GCR finalised the review for NICO General Malawi under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for NICO General Malawi has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
NICO General Malawi’s very strong competitive position represents a key rating strength. The insurer accounted for 36% of the short term insurance industry gross premiums in FY18 (maintaining market leadership throughout the review period), with a relative market share of 4x. The dominant market position is viewed to be underpinned by strong broker relationships and a relatively fair control of the market through direct sales and agents. Moreover, the insurer’s brand association with Sanlam Pan Africa is expected to improve market power, further defending market share within a very strong range over the medium term.
Despite operating in a market that is dominated by motor premiums, NICO General Malawi displays a fairly diversified premium base. The insurer’s business mix is spread across three material lines that are well retained, translating into a similar spread on the risk base. Product risk is viewed to be low, reflecting moderation of fire and accident risks by the motor portfolio. Going forward, premium diversification is expected to measure within a similar range, albeit with some focus on engineering business portending further diversification.
NICO General Malawi evidences a comparatively efficient cost structure that supports strong earnings capacity. Overall, the insurer’s competitive cost base is expected to protect earnings, having registered a review period average total expense ratio of 33%, corresponding to an underwriting margin of 10% (previous year average: 13%). This is largely a function of relatively high scale efficiencies and commission recoveries from the fire portfolio, which are expected to persist over the outlook period. While note is taken of the increase in the loss ratio registered in FY18 on the back of a fire loss, a recovery registered in the recent interim period supports GCR’s view of sound earnings resilience. This notwithstanding, earnings risk from rates and claims frequency pressures could moderate earnings capacity over the medium term.
Risk adjusted capitalisation measured at a strong level, supported by average underwriting risk and fairly prudent exposures to market and counterparty risks. NICO General Malawi’s underwriting risk exposures have been maintained at fairly conservative levels over the review period, with shareholder funds largely measuring between 60% and 70% of net written premiums. Furthermore, high risk asset exposure was largely limited to listed equities, which measured at 23% of capital at FY18. Going forward, GCR expects risk adjusted capitalisation to be managed within a strong range over the rating horizon, given a level of consistency in capital management, albeit with high dividend payments (review period dividend pay-out rate: 66%) evidencing potential to moderate the factor’s assessment over the medium term.
The insurer exhibits consistency in managing liquidity, which has been maintained within a moderate range over the review period, amidst relatively strong premium growth and highly volatile credit conditions in the market, as well as relatively high dividend payments. Furthermore, disciplined claims management contributed to a level of reserving consistent with stressed financial assets coverage of net technical liabilities of 1.6x over the past four years, with the corresponding coverage of operational requirements having floated above a very prudent 12 months. This notwithstanding, liquidity pressures could increase over the medium term should recent claims and credit pressures stemming from the operating environment exceed the strength of risk mitigating measures.
The credit profile of NICO General Malawi is moderated by GCR’s assessment of wider risks at NICO Holdings Limited (“the group”), which reflects relatively lower capitalisation strength.
The stable outlook reflects GCR’s view of a stable risk profile of the wider group, while evidenced review period containment of credit risk and a recovery in earning performance at company level point to relative stability in sensitive credit factors.
An improvement in GCR’s assessment of the credit profile of the group could benefit the rating. Conversely, a material reduction in liquidity or sustained weakening in earnings capacity could result in negative rating pressure.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, July 2019|
NICO General Malawi
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(MW)||Stable Outlook||May 2008|
|Last||National||AA-(MW)||Stable Outlook||August 2018|
Risk Score Summary
|Risk score||NICO General Malawi|
|Country risk score||1.50|
|Sector risk score||2.75|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and un-designed, which occurs suddenly and at a definite place.|
|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.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Captive Insurance Company||A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|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.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|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.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|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 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 NICO General 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.
NICO General 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 NICO General Insurance Company Limited and other reliable third parties to accord the credit rating 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;
- Reinsurance cover notes for 2019;
- Other relevant documents.