October 27, 2017 / 3:58 PM / 2 months ago

Fitch Affirms Nova Sociedade de Seguros de Angola's IFS at 'B'; Outlook Negative

(The following statement was released by the rating agency) LONDON, October 27 (Fitch) Fitch Ratings has affirmed Nova Sociedade de Seguros de Angola SA's (Nossa) Insurer Financial Strength (IFS) Rating at 'B'. The Outlook is Negative. KEY RATING DRIVERS Nossa's rating is constrained by Angola's Long-Term Local Currency Issuer Default Rating (IDR) of 'B'/Negative and Fitch's view of the credit quality of controlling shareholder Banco Angolano de Investimentos SA (BAI), one of the largest banks in Angola. High investment risk and the insurer's small size and scale are key rating weaknesses. These rating weaknesses are offset by supportive capitalisation and Nossa's established franchise with a clear operating strategy. The constraints on Nossa's rating reflect the insurer's exposure to sovereign and domestic bank obligations and a weakening operating environment. The Angolan economy remains weak, with a short supply of foreign currency, high inflation and subdued growth prospects. Its insurance market is small, with low penetration, a lack of understanding of the benefits of insurance products and high barriers to entry in specific segments of the market. Nossa's investment environment is limited to mainly sub-investment-grade assets. Moreover, the current absence of formal secondary markets in Angola limits the availability of liquid investments. As a result, Nossa's investment portfolio is exposed to significant credit and concentration risk, despite a conservative investment strategy. Nossa is the fifth-largest insurer in Angola by gross written premiums (GWP) with a market share of around 9%, but is small in absolute terms (2016 GWP around USD36 million). Nossa has made strong progress in diversifying its overall business mix by reducing its exposure to the motor business, which contributed 41% of GWP in 2016 (2015: 49%). In 1H17 motor contributed 31% to overall premiums, with workmen's compensation and health insurance contributing 27% and 20% respectively. Capitalisation is supportive of the rating. Nossa's regulatory solvency margin of 195% compares favourably with peers', and the insurer has maintained coverage of at least 120% of the minimum requirement for each of the past six years. Fitch expects Nossa to remain well- capitalised in the medium term. Nossa scored 'weak' on Fitch's Prism factor-based capital model (Prism FBM) at end-2016, a level commensurate with its rating. The Prism FBM score is driven by investment risk, largely due to the absence of available investment-grade assets, and concentration risk. Nossa has a clear strategy that focuses on four pillars: clients, products, geographic diversification and the development of bancassurance, direct and digital distribution channels. The experienced management team continues to instil strong governance, good client service and best practice business processes. Fitch views this approach as a potential differentiator in the highly under-developed Angolan insurance market. Nossa's pre-tax operating profit improved significantly in 2016 despite a challenging economic environment. Net income return on equity (ROE) improved to 31% in 2016 (2015: 17%) with strong growth in investment income offsetting a weakening underwriting profit. The Fitch-calculated combined ratio weakened slightly to 93% in 2016 (2015: 91%) as a result of a higher expense ratio. Despite persistent expense inflation, Fitch expects Nossa's operating profitability to remain resilient in 2017. RATING SENSITIVITIES A sustained weak operating environment, indicated by a sovereign downgrade, would result in a downgrade. Conversely, a revision of the sovereign Outlook to Stable could result in a Stable Outlook for Nossa. A weakening of Fitch's assessment of the credit quality of BAI could result in a downgrade in Nossa's ratings. A downgrade could result from a failure by Nossa to successfully implement its growth strategy, indicated by a sustained inflation-adjusted decline in GWP or a significant decline in profitability. Contact: Primary Analyst Willem Loots Senior Director +44 20 3530 1808 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eugene McGeown Analyst +44 20 3530 1767 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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