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

15 July 2014GCR

Global Credit Ratings (GCR) has upgraded the national scale claims paying ability rating assigned to Nedgroup Insurance Company Limited (NEDIC) to AA-(ZA); with the outlook accorded as Stable.

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.

According to GCR, 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.

Futhermore, 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.

GCR notes, 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.

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