Announcements

GCR upgrades Nedgroup Insurance Company Limited’s rating to AA-(ZA); Outlook Stable.

Johannesburg, 13 Jun 2014 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Nedgroup Insurance Company Limited to AA-(ZA); with the outlook accorded as Stable. Furthermore, Global Credit Ratings has upgraded the international scale claims paying ability rating assigned to Nedgroup Insurance Company Limited to BBB; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nedgroup Insurance Company Limited (“NEDIC”) based on the following key criteria:

NEDIC is wholly owned by Nedbank Group Limited, one of the largest banking institutions in South Africa (AA(ZA) national scale rating). The ultimate shareholder, Old Mutual Plc, is rated BBB on an international scale. The rating is supported by NEDIC’s access to the group’s customer base and common branding, as well as the alignment of risk and capital management policies with group policies, which point to NEDIC’s high level of strategic importance to the group.

The insurer’s sound underwriting track record was favourably considered, with the underwriting margin exceeding the industry average by more than 7 percentage points over the review period. This is expected to continue in the medium term, although GCR expects the differential to narrow as the insurer grows into more competitive personal lines business. In this regard, note is taken of NEDIC’s cautious approach to personal lines expansion, through strategic alliances with established multi-line players, as well as the use of quota share reinsurance cover. Despite elevated concentration per line of business, the high degree of policyholder diversification and access to group distribution channels limit risk to revenue generation and profitability, and have historically underpinned a high growth trajectory.

Solvency measures have been maintained at adequate levels and are complemented by an internal economic capital model that is aligned with group policies. The international solvency margin is expected to remain above 50%, while statutory CAR cover is to be maintained above 1.3x, which GCR considers to be commensurate with the insurer’s risk profile. Capitalisation levels are further supported by the high quality of counterparties on the reinsurance programme. Furthermore, strong operating cash flow generation has supported the accumulation of a sizeable investment portfolio (more than 120% of shareholders funds) and contributed to an adequate level of liquidity.

Given the increase in the delivery cost base, the successful bedding down of expansion initiatives, together with effective claims controls are critical to longer term profitability. A further strengthening in the business profile, including enhanced market share and earnings diversification, could give rise to an upward rating adjustment. In contrast, a downward rating movement may be triggered by a sustained deterioration in operating performance that lowers the degree of strategic importance to the group, or a contraction in solvency levels below group capital adequacy targets. Furthermore, a change in the shareholder’s rating may prompt a commensurate change in NEDIC’s claims paying ability rating.

For a detailed glossary of terms utilised in this announcement please click here

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATING HISTORY
Initial rating (Sep/2012) Initial / last rating (July/2013)
Claims paying ability: A+(ZA) Claims paying ability: BBB-
Outlook: Stable Outlook: Positive

Last rating (July/2013)
Claims paying ability: A+(ZA)
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Susan Hawthorne
Analyst
(011) 784-1771
Susanh@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
Chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies (July 2013)
Nedgroup Insurance Company Limited rating reports (2012-2013)

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Nedgroup Insurance Company Limited 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 ratings have been disclosed to Nedgroup Insurance Company Limited with no contestation of the ratings.

The information received from Nedgroup Insurance Company Limited and other reliable third parties to accord the credit ratings included the audited annual financial statements to December 2013 (plus four years of comparative numbers), the full year detailed budgeted financial statements to December 2014, most recent year to date management accounts to April 2014, the current year reinsurance programme summary, information provided by management in GCR’s rating questionnaire, the qualitative and quantitative statutory returns for the 2013 financial year and the quarterly statutory return to March 2014.

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.

GCR upgrades Nedgroup Insurance Company Limited’s rating to AA-(ZA); Outlook Stable.

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