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FINANCIAL INSTITUTIONS

CREDIT OPINION19 December 2016

Update

RATINGS

Namibia National Reinsurance CorpLimitedDomicile Namibia

Long Term Rating Ba1

Type Insurance FinancialStrength

Outlook Negative

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Brandan Holmes 44-20-7772-1605VP-Senior [email protected]

Charles Isselin-Pontet

44-20-7772-5573

Associate [email protected]

Antonello Aquino 44-20-7772-1582Associate [email protected]

Namibia National Reinsurance Corp LimitedUpdate following Affirmation of the Ratings

Summary Rating RationaleSummary Ratings Rationale

NamibRe’s Ba1 IFS rating reflects the company’s ba2 standalone credit assessment and onenotch of uplift due to implicit support from its sole shareholder, the Government of Namibia(Baa3, negative), hereinafter referred to as the government.

The ba2 standalone credit assessment reflects (i) NamibRe's secure position in the Namibianinsurance market - a result of the legislated mandatory cession, (ii) its good capitalizationrelative to its currently insured exposures, (iii) its moderate asset risk, and (iv) the relativelyshort-tailed nature of the majority of its insurance exposures, which lowers reserving risk.Partially offsetting these strengths are (i) NamibRe's very small size relative to its globalreinsurance peers, (ii) its geographic concentration in Namibia, (iii) uncertainty aboutchanges to NamibRe's premium volume, profitability and capitalisation as a result of theexpanded mandatory cession, (iv) moderate profitability, and (v) less robust underwriting andrisk management capabilities relative to its global peers.

NamibRe is a state-owned corporation which was established by an Act of Parliament, theNamibRe Act (Act 22 of 1998), and commenced operations in 2001. NamibRe’s mandate isto reduce capital outflows in the form of reinsurance premiums, and to retain, in Namibia,more of the capital generated by the insurance industry in the country. To assist in fulfillingits mandate, the NamibRe Act stipulates a mandatory cession, to NamibRe, of a portionof all insurance and reinsurance premiums written in Namibia. On 1 November 2016, theNamibian Ministry of Finance announced changes to the implementation of the mandatorycession rules that would both increase the number of policies included in the scope of themandatory cession and over time, increase the cession amount, up from the current 10%of premiums to 20% of premiums by 2020. NamibRe is licensed by the Namibia FinancialInstitutions Supervisory Authority (NAMFISA) to write both life and non-life (re)insurance.

The government does not provide explicit support to NamibRe, however, we believe there issufficient evidence of implicit support to provide one-notch of uplift above the standalonecredit assessment. Implicit support for NamibRe is evidenced in the government's 100%ownership of NamibRe, its track record of supporting state-owned corporations, NamibRe'strack record of profitability and progress in fulfilling the government's policy objective andthe government's active involvement in the oversight of NamibRe, including a requirementthat it appoint all the directors on NamibRe's board. In addition, the mandatory cessionunder the NamibRe Act is a strong indicator of the importance of NamibRe’s mandate.

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit Strengths

» Ownership by the government and mandatory cession to secures market position

» Good capital based relative to insured exposures

» Secure position in the Namibian insurance market - a result of the legislated mandatory cession Credit Challenges

Credit Challenges

» Concentrated exposure to Namibia, both with respect to insurance exposures and asset base

» Increased underwriting leverage, and potential pressure on capital adequacy, as a result of the expected significant increase inpremiums relative to capital

» The company’s lack of scale relative to the expense base, putting pressure on profitability

» Limited in-house underwriting expertise and reliance on reinsurers and primary insurers for the majority of technical underwriting

Rating OutlookThe outlook for the rating is negative.

The negative outlook reflects the negative outlook for NamibRe’s parent, the Government of Namibia and our view that there ismoderate linkage between NamibRe’s IFS rating and that of the the government. Because its IFS rating incorporates support from thesovereign, and due to the fact that NamibRe's market position and franchise is dependent on continued government support for themandatory cession legislation, we consider NamibRe's IFS rating to have moderate linkage to the sovereign rating.

What to watch for:

» Capital adequacy level following the new business growth in line with the increase in the mandatory cession

» Changes in the company’s overall liability profile and increased need for asset liability matching as the company starts assuming lifeinsurance business

Factors that Could Lead to an UpgradeGiven the negative outlook for the Government of Namibia and NamibRe, an upgrade of NamibRe’s rating is unlikely in the near term.However, a return to a stable outlook could result from either:

» The outlook for the Government of Namibia reverting to stable

» Increased certainty about the future capital adequacy and profitability of the corporation following the increased mandatorycession, including (i) loss ratios remaining generally in line with industry and the company’s historical performance, (ii) reinsuranceprogrammes that appropriately mitigate the risks related to the expected significant increase in new premium volume, and (iii)increased net income and growth in the company’s capital base

Factors that Could Lead to a Downgrade

» A downgrade of Namibia's government debt rating and/or a weakening credit profile of the Namibian banking sector

» Evidence of a decrease in the level of implicit support from the government, including elimination or meaningful reduction of themandatory cession

» Deterioration in the combined ratio or the inability to maintain a sub-100% combined ratio

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 19 December 2016 Namibia National Reinsurance Corp Limited: Update following Affirmation of the Ratings


» Meaningful increase in net retention, relative to shareholder’s equity (i.e. meaningful weakening of capital adequacy), absentappropriate reinsurance structures to mitigate risk of adverse claims experience

» Meaningful weakening in the credit profile of the key reinsurers participating on the corporation’s reinsurance panel

» A 10% decline in shareholders' equity over a 12-month period (from underwriting losses and/or capital management activity)

Key Indicators

Exhibit 1

Source: Company reports and Moody's Investors Service

Detailed Rating ConsiderationsMoody’s rates NamibRe Ba1 for insurance financial strength, which is one notch above the adjusted standalone credit assessment thatis shown in the rating scorecard on the last page of this report. NamibRe receives one notch of rating uplift for implicit support fromits parent, the Government of Namibia. NamibRe’s ba2 standalone credit assessment is four notches lower than the Baa1 produced byMoody’s unadjusted rating scorecard, and is primarily a result of the company’s small size and concentrated exposure to Namibia, weakprofitability relative to expectations and exposure of its assets to Namibia and the Namibian banking system.

MARKET POSITION, BRAND AND DISTRIBUTION: B – MARKET POSITION SECURED BY MANDATORY CESSION

Scale is generally a key factor in a reinsurers ability to build and maintain its market position. NamibRe is meaningfully smaller thanits global reinsurance peers, with gross written premiums of N$ 211 million (approximately US$ 15 million) for the year ended 31March 2016 and reported shareholder’s equity of N$ 166 million (approximately US$ 11 million). While NamibRe is smaller than wouldordinarily be required for a reinsurer with a similar standalone credit profile, the corporation benefits from the legislated mandatorycession, which secures its market position and relevance. Over time, as a result of the significantly increased premium volume expectedfrom the changes to the mandatory cession, we expect NamibRe’s market presence to strengthen. Absent the mandatory cession andgovernment ownership, we would expect NamibRe's credit profile to be closer to the single-B range.



NamibRe is well established in the Namibian market, and benefits from long-standing relationships with the major brokers, who areinstrumental in operational execution of the mandatory cession.

BUSINESS AND GEOGRAPHIC DIVERSIFICATION: Ba – PRODUCT DIVERSITY BENEFITS FROM QUOTA SHARE WITHESTABLISHED INSURERS

NamibRe sources approximately 90% of its premiums in the Namibian market, with the remainder from a number of other Africancountries. The largest insurers in the Namibian market are subsidiaries of the largest South African insurers, which benefit fromrelatively sophisticated underwriting and risk management capabilities. In addition, these insurers have a relatively diverse businessmix, and through its quota-share, NamibRe benefits from ready access to well-underwritten and diverse flow of new business, includingfire, marine, motor, guarantee and engineering, medical and various personal lines. The significant majority of the business sourced inNamibia is broker placed. NamibRe has started to diversify into Life insurance, although premiums generated in 2015 remain modest.Going forward, we expect premiums from life insurance to increase significantly, as it will be capture in the policy level mandatorycession.

The company’s sources approximately 10% of is premiums written from other African countries, mostly on a direct basis. The countryrelies on its reinsurance partners for underwriting expertise on this business, much of which is written on a facultative basis. While theother-African business adds geographic diversity to the book, it has also demonstrated higher than expected losses.

ASSET QUALITY: Baa – CONCENTRATED EXPOSURE TO NAMIBIA AND ITS BANKING SYSTEM

The company maintains a conservative investment strategy, in line with its objectives of capital preservation and liquidity. As such, thesignificant majority of the company’s assets are currently held in cash and fixed deposits with local banks and fixed income or moneymarket unit trusts. However, in prior years, a higher portion of invested assets were held in Namibian Government Bonds or in debtissued by state-owned enterprises. At 31 March, 2016, the company held approximately 83% of its investments in local cash and short-term instruments (2014: 96%) and the remaining 17% in government bonds (2014: 4%).

NamibRe’s invested assets are concentrated in Namibian exposures, and particularly in exposures to the government and bankingsector. As such, we consider NamibRe’s credit profile to be linked to that of the Namibian government and banking sector, as reflectedin the Baa score for Asset Quality.

The company’s recoverable from reinsurers represents a low exposure for the company, at a relatively low 2.7% of shareholder’s equity.A majority of reinsurers from which NamibRe purchases retrocession are strong, global reinsurers.

CAPITAL ADEQUACY: Baa – LOW UNDERWRITING LEVERAGE; EXPECTED TO INCREASE WITH HIGHER MANDATORYCESSION

NamibRe has been consistent in maintaining low underwriting leverage, reflected in our Gross Underwriting Leverage metric of 1.5x forthe past three years. This low underwriting leverage is driven, in part, by NamibRe’s focus on short-tailed product lines which requirelower reserves relative to longer-tailed lines. In addition, the company has retained a significant portion of its earnings, allowing capitalto build up over time, in line with the increase in insurance exposures. While the company has retained meaningfully in excess ofthis amount, the NamibRe Act requires the company to retain at least 25% of its profits in a general reserve fund, which ensures aminimum level of capital retention.

Regulatory requirements (the Short-Term Insurance Act of 1998) require the company to maintain a solvency margin, defined asthe percentage by which its assets exceed its net liabilities, of at least 15%. At 31 March 2016, NamibRe’s solvency margin was 96%,an increase of c.12% since year-end March 2015 and significantly in excess of regulatory requirements. NamibRe generally avoidsunderwriting catastrophe-exposed risks, and as such, has limited exposure to potential losses caused by natural catastrophes

Absent contribution of additional capital, we expect the company’s level of capital adequacy to decline over the next few years, as thehigher mandatory per-policy cession rate increases the volume of gross and net premiums written. In addition, as the company seeksto use the mandatory cession to expand into life insurance, we expect the duration of its insured exposures to lengthen, reflecting thelonger-tailed nature of life insurance, and resulting in higher reserve balances over time.



PROFITABILITY: Ba – PROFITABILITY EXPECTED TO IMPROVE AS PREMIUMS INCREASE IN-LINE WITH THE EXPANDEDMANDATORY CESSION

NamibRe’s combined ratio for the year ended 31 March, 2016 was approximately 101.2%, improving from 102.3% in 2015 and lowerthan the five-year average combined ratio of 104.5%. The company’s combined ratio, in excess of 100%, primarily due to a premiumbase that is marginally below the level required to comfortably support the cost of the company’s operating infrastructure. Theexpanded mandatory cession, and expected increase in NamibRe’s written premiums should drive improvement in the expense ratioover time. The company generated net income of approximately NA$ 17 million for the year-ended 31 March, 2016, primarily theresult of investment income.

The company’s five-year average return on capital of approximately 10.5%, is good by global standards, but we would consider thislow-to-moderate in the Namibian context, relative to the yield of approximately 8% on the 10 year government bond. While returnon capital is low-to-moderate, relative to the government bonds, we do not consider it to be a key driver of NamibRe’s credit profile,because the company’s mandate is government policy orientated, as opposed to profit-driven.

Exhibit 2

Net Income and Return on Capital


RESERVE ADEQUACY: Ba – MODERATE RESERVE RISK DUE TO SHORT-TAILED BUSINESS

NamibRe’s predominately short-tail focused general insurance book allows the majority of claims to be settled within two to threeyears of policy underwriting, reducing the risk of unexpected losses emerging from older accident or underwriting years. While thenature of NamibRe’s exposures do not present the type of reserve risks typically associated with longer-tailed business, the companyhas experienced meaningfully higher claims than expected in certain lines, particularly fire, leading to adverse reserve developmentin past years. In addition, some of the company’s facultative exposures outside of Namibia have demonstrated higher than expectedlosses in the past. The company has taken steps to reduce the incidence of adverse claim and reserve development, includingthe addition and training of key technical and underwriting staff, and more stringent risk selection. However, we believe that thecompany’s limited technical and underwriting resources remain a risk, given the broad range of lines the company insures, in Namibiaand other African countries, and its expansion into life insurance, which will require additional underwriting and reserving expertise.

FINANCIAL FLEXIBILITY: Baa – ACCESS TO CAPITAL THROUGH THE GOVERNMENT OF NAMIBIA



NamibRe has no debt outstanding, and because it is 100% owned by the Government of Namibia, it is dependent on the governmentfor access to capital markets. We believe that the extent of implicit support from the government indicates a high likelihood of thegovernment providing financial flexibility in the event NamibRe requires it.



Rating Methodology and Scorecard Factors

Exhibit 3


Ratings

Exhibit 4Category Moody's RatingNAMIBIA NATIONAL REINSURANCE CORP LIMITED

Rating Outlook NEGInsurance Financial Strength Ba1

Source: Moody's Investors Service



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