Johannesburg, 19 December 2017 — 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:
Bidvest Insurance’s rating has been affirmed at A(ZA), with a stable outlook, based on the insurer’s strong aggregate financial profile. While atypically large dividend payments over the past two years resulted in a dilution in capitalisation and liquidity, these are expected to stabilise within strong and moderately strong respective ranges over the outlook horizon, supported by the projected increase in earnings retention.
In this respect, the insurer’s earnings capacity is assessed to be strong, supported by a highly competitive net incurred loss ratio. Despite a relative softening during the expansionary phase (a function of new business cost strain), the two year average underwriting margin equated to 10%, while the corresponding return on net revenue stood at 15%. GCR expects earnings metrics to remain within a strong range over the outlook horizon, although notes potential sensitivity to investment market volatility.
The substantial dividend extractions in FY16 and FY17 and growth in the risk base resulted in a moderation in risk adjusted capitalisation relative to the very strong levels reflected historically. The insurer nevertheless aims to manage Statutory Capital Requirement coverage within a strong range going forward, supported by more conservative dividend distributions. Net deductibles are limited to conservative levels relative to capital, while the reinsurance programme reflects a sound aggregate counterparty credit profile.
Similarly, the large dividend payment resulted in a dilution in liquidity to an intermediate level in FY17, with strong operational cash coverage metrics offset by a contraction in cash coverage of net technical liabilities. GCR’s assessment of the insurer’s overall liquidity profile nevertheless considers the support available from the large portfolio of tradeable investments, as well as the longer term liability profile associated with the warranty business. The insurer displays a high investment risk appetite, with higher risk assets corresponding to 121% of shareholders’ funds at FY17 (FY16: 92%). 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.
Bidvest Insurance’s rating nevertheless considers the insurer’s very limited market share, 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, and development of niche motor Value Added Products, which could contribute towards enhanced diversification and scale efficiencies (albeit introducing an element of execution risk). The business mix is heavily weighted towards the motor line of business, although note is taken of the high degree of policyholder granularity within these books, and the reasonably low product risk (supported by a large niche component).
GCR considers Bidvest Insurance to be strategically important to The Bidvest Group Limited (“Bidvest”), given the brand alignment and cross-synergies between Bidvest’s insurance and sales operations (dealerships and other intermediaries), as well as the insurer’s participation on a portion of Bidvest’s asset insurance covers.
Successful execution of expansion initiatives and a 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. This would need to be accompanied by a stabilisation in liquidity and capitalisation metrics in line with expectations. In contrast, the rating is sensitive to a further reduction in risk adjusted capitalisation, while negative rating action may be taken if liquidity continues to register at weaker levels.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2015)|
|Claims paying ability: A(ZA)|
|Last rating (November 2016)|
|Claims paying ability: A(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|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 2017
RSA Short Term Insurance Bulletins, 2001-2016
Bidvest Insurance rating reports, 2015 – 2016
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 Bidvest Insurance Limited and other reliable third parties to accord the credit rating included:
- Audited annual financial statements to 30 June 2017
- Four years of comparative financial statements to 30 June
- Budgeted financial results to 30 June 2018
- Statutory returns to 30 June 2017
- The current year reinsurance programme summary
- Other relevant company specific information
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
|ssets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|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.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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.|
|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.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Statutory||Required by or having to do with law or statute.|
|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 more detailed glossary of terms, please click here
GCR affirms Bidvest Insurance Limited’s rating of A(ZA); Outlook Stable