Johannesburg, 9 November 2015 — Global Credit Ratings has today assigned an initial national scale claims paying ability rating to Bidvest Insurance Limited of A(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Bidvest Insurance Limited (“Bidvest Insurance”) based on the following key criteria:
GCR considers Bidvest Insurance to be strategically important to The Bidvest Group Limited, given the brand alignment and cross-synergies between the group’s insurance and sales operations (dealerships and travel agencies), as well as the insurer’s participation on a portion of the group’s asset insurance covers.
The rating is underpinned by Bidvest Insurance’s strong nominal and risk adjusted capitalisation levels. Management has committed to maintaining a minimum SCR cover of 1.5x under Solvency Assessment and Management (“SAM”), implying sustained strong risk adjusted capital adequacy through the medium term expansionary phase. Bidvest Insurance’s operations have been highly cash generative over the review period, having benefited from strong levels of net profitability and upfront collection of term policy premiums. This has underpinned sound liquidity levels (against near term policyholder liabilities), which are expected to be maintained within a strong range over the outlook horizon. The reinsurance programme reflects a strong counterparty credit profile and limits net deductibles to conservative levels against capital.
The insurer displays a high investment risk appetite, with listed shares corresponding to 110% of shareholders’ funds at FYE15 (BYE16: approximately 128%). Note is, however, taken of the high degree of underwriting stability and strong risk adjusted capitalisation, which in GCR’s view position the insurer to absorb a degree of potential market volatility. GCR considers Bidvest Insurance’s earnings capacity to be strong and sustainable over the rating horizon, underpinned by sound cross-cycle underwriting resilience. Despite the insurer’s motor orientated focus, the high degree of policyholder granularity and large component of non-comprehensive niche products imply limited earnings volatility and product risk.
Bidvest Insurance’s market share is very limited, which is a function of its historical focus on niche motor related products. Longer term growth is expected to be underpinned by strategic expansion into commercial and personal lines, coinciding with extension of the distribution network. This could contribute towards enhanced diversification and scale efficiencies. While the new strategy introduces an element of execution risk (particularly in light of intensive competition), note is taken of the insurer’s conservative initial approach to growth in these lines, which will be heavily reinsured and underwritten selectively.
The successful execution of expansion initiatives and potentially strengthened business profile (by way of both an increase in market share and enhanced earnings diversification) could translate into positive rating movement over the longer term. In contrast, a sustained deterioration in capital adequacy or liquidity levels could place downward pressure on the rating.
NATIONAL SCALE RATINGS HISTORY
Initial /Last rating (November 2015)
Claims paying ability: A(ZA)
Primary Analyst Committee Chairperson
Susan Hawthorne Marc Chadwick
Senior Credit Analyst Sector Head: Insurance Ratings
(011) 784-1771 (011) 784-1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|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.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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.|
|Interest||Money paid for the use of money.|
|Investment Risk||The risk of a decline in the net realisable value of investment assets arising from adverse movements in market prices or factors specific to the investment itself.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
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.
Bidvest Insurance Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Bidvest Insurance Limited with no contestation of the rating.
The information received from Bidvest Insurance Limited and other reliable third parties to accord the credit rating(s) included:
- Unaudited management accounts to 30 June 2015
- Four years of audited comparative numbers to 30 June
- Budgeted financial statements to 30 June 2016
- The 2015/2016 reinsurance programme summary
- Other relevant documents
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 accords an initial rating of A(ZA) to Bidvest Insurance Limited; Outlook Stable.