Announcements Insurance Rating Alerts

GCR revises NSIA Insurance Company Limited’s national scale financial strength rating to A-(GH) on criteria change; Outlook Stable

Rating Action

Johannesburg, 2 April 2020 – GCR Ratings (“GCR”) has revised NSIA Insurance Company Limited’s (“NSIA Insurance”) national scale financial strength (formerly claims paying ability) rating to A-(GH), from BBB+(GH), with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
NSIA Insurance Company Limited Financial strength National A-(GH) Stable Outlook

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

Rating Rationale

NSIA Insurance’s rating reflects a very strong financial profile along with demonstrated support from the parent company, NSIA Participations S.A (“the group”). Offsetting these rating strengths is a very limited business position, given the relatively small size of the insurer in the context of the Ghanaian short-term insurance industry.

Risk adjusted capitalisation remained very strong, underpinned by limited market and credit risk exposures. Accordingly, the GCR CAR coverage persistently measured above 3x over the past four years, while the statutory CAR comfortably trended above the regulatory minimum of 150% over the corresponding period. Nevertheless, we believe the nominal size of capital is small and vulnerable to large claims shocks.

Supported by a conservatively invested asset portfolio, the insurer continued to evidence a very strong liquidity profile. In this respect, the liquidity ratio closed at 4.5x at FY19 (FY18: 4.0x), while cash and stressed financial assets covered operational cash requirements by 31 months (FY18: 28 months).

Despite demonstrating an improving trend in underwriting performance over the past four years, NSIA Insurance’s earnings measured within a moderately weak range. The underwriting margin equated to -24% in FY19 (FY18: -40%; FY17: -43%), while the overall return on revenue remained volatile, equating to 10% (FY18: -9%; FY17: 42%). Moderately weak underwriting performance is largely a function of the insurer’s limited scale, which is insufficient to absorb a relatively elevated operating cost base. On the other hand, strong investment returns are typical in Ghana.

The insurer’s financial profile is expected to be sustained over the outlook horizon, supported by a capital base large enough to absorb aggregate risk exposures along with conservative asset allocation, offsetting earnings risk.

The business profile is considered very limited, representing a key rating weakness. In this regard, the insurer’s competitive position remains modest, with market share estimated at around 1% at FY19. Furthermore, the business mix displays a high degree of single product concentration, which is nonetheless an industry-wide phenomenon. In this respect, motor, representing the primary portfolio, accounted for 62% and 76% of the gross and net premium base respectively in FY19. Management plans to grow market share through intensifying advertising and brand awareness, widening distribution channels and deepening existing relationships with insurance intermediaries.

The rating derives uplift from NSIA Participations S.A, a majority shareholder in NSIA Insurance, given evidence of strategic and operational integration.

Outlook Statement

The Stable Outlook reflects expectations of sustained financial profile strength, while considering the potential for earnings weakness to persist, with underwriting performance forecast to remain in the negative territory over the outlook horizon. In this respect, the GCR CAR coverage is likely to remain above 3x, while liquidity metrics may stabilise at current levels. The return on revenue is likely to moderate and remain volatile given expectations of interest rate cuts in response to the COVID-19 pandemic. Furthermore, the market share is expected to trend below 2% given the challenging operating environment and competitive dynamics playing out in the local market.

Rating triggers

Upward rating movement may follow simultaneous and sustained improvements in the group’s overall credit profile, NSIA Insurance’s business profile and earnings capacity, while capitalisation and liquidity metrics are maintained at strong levels. Although unlikely, negative rating action may result from a material deterioration in earnings capacity should this adversely impact other credit protection metrics.

Analytical Contacts

Primary analyst Tichaona Nyakudya Senior Analyst: Insurance
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance
Johannesburg, ZA GodfreyC@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

NSIA Insurance Company Limited

Rating class Review Rating scale Rating Outlook Date
Claims paying ability Initial/Last BBB+(GH) National Stable September 2018

Risk Score Summary

Risk scores NSIA Insurance
Operating environment 8.00
Country risk score 3.75
Sector risk score 4.25
Business profile (4.25)
Competitive position (3.25)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 3.00
Earnings (1.00)
Capitalisation 2.00
Liquidity 2.00
Comparative profile 1.00
Group support 1.00
Government support 0.00
Peer analysis 0.00
Total Score 7.75

Glossary

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.
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.
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.
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.
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.
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.
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.
Policyholder The person in actual possession of an insurance policy.
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 rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to NSIA Insurance Company Limited. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. NSIA 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 NSIA Insurance Company Limited and other reliable third parties to accord the credit rating included:

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