GCR affirms Bidvest Insurance Limited’s rating of A(ZA); Outlook Stable.

Johannesburg, 1 December 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned 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:

The rating is underpinned by Bidvest Insurance’s very strong level of risk adjusted capitalisation. Solvency Capital Requirement (“SCR”) cover has been maintained at very high levels over the past two years, and is projected to be sustained at around these levels over the medium term after applying various stress scenarios. Accordingly, GCR expects risk adjusted capital adequacy to remain very strong through the insurer’s near term expansionary phase.

Earnings capacity is assessed to be very strong, supported by a highly competitive net incurred loss ratio. The five year average underwriting margin amounted to 17% in FY16, while the corresponding return on net revenue registered at 35%. Despite the anticipated softening over the medium term (a function of base adjustments in FY16 and new business cost strain), GCR expects underwriting and net profitability to remain within a strong range over the outlook horizon, underpinned by sound cross cycle underwriting resilience.

The insurer displays a high investment risk appetite, with higher risk assets corresponding to 94% of shareholders’ funds at FYE16 and increasing to 125% at 1Q F17. Investment into additional equity instruments could contribute towards a further rise in asset risk over the short to medium term. Note is, however, taken of the high degree of underwriting profitability and strong risk adjusted capitalisation, which in GCR’s view positions the insurer to absorb a degree of potential market volatility. Furthermore, key liquidity metrics remain robust. Cash coverage of average monthly claims amounted to 32 months in FY16 (review period average: 36 months), while cash coverage of near term policyholder liabilities registered at 1.2x at FYE16 (review period average: 1.3x). Going forward, liquidity metrics are expected to moderate in line with the revised investment allocation strategy, although remaining sound and supportive of the rating.

Bidvest Insurance’s market share is very limited, which is a function of its historical focus on niche motor related products. In this regard, the business mix is heavily weighted towards the motor line of business, although the portfolio evidences a high degree of policyholder granularity and reasonably low product risk (given the large niche component). Longer term growth is expected to be underpinned by strategic expansion into commercial and personal lines, which 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 these lines, which are heavily reinsured, while higher risk exposures are underwritten selectively. The reinsurance programme reflects a strong counterparty credit profile and limits net deductibles to conservative levels against capital.

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 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.

ANALYTICAL CONTACTS

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2016

Bidvest Insurance rating report 2015

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.

Bidvest Insurance 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 rating has been disclosed to Bidvest Insurance Limited with no contestation of the rating.

The information received from The Bidvest Insurance Limited and other reliable third parties to accord the credit rating included:

• The latest audited financial statements to 30 June 2016
• Four years of comparative audited financial statements to 30 June
• Budgeted financial statements to 30 June 2017
• The 2016/2017 reinsurance programme summary
• Other relevant documents

The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY>

Assets	A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
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.
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.
Equity	Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Execution Risk	The risk that a company’s business plans will not be successful when they are put into action.
Exposure	Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
Incurred Loss	The total amount of paid claims and loss reserves associated with a particular time period, usually a policy year.
International Scale Rating LC	International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
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 (e.g. reputation and the quality of management).
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.
Loss	The happening of the event for which insurance pays.
Net Incurred Loss	The total amount of paid claims and loss reserves associated with a particular time period, less the reinsurance portion.
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.
Personal Lines	Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.
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.
Shareholder	An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.
Underwriting Margin	Measures efficiency of underwriting and expense management processes.

For a detailed glossary of terms please click here

GCR affirms Bidvest Insurance Limited’s rating of A_(ZA); Outlook Stable.

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