Johannesburg, 30 August 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Bryte Insurance Company Limited of A+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Bryte Insurance Company Limited (“Bryte Insurance”) based on the following key criteria:
Bryte Insurance’s rating is supported by sound risk adjusted capitalisation, underpinned by contained underwriting risk and conservative investment allocation. Capital is managed within an internal target band based on the Solvency Assessment and Management standard formula, implying that risk adjusted capitalisation will be sustained within a sound range going forward. This is nevertheless premised on well managed growth and achievement of net profit projections. The high quality of large reinsurance counterparties and conservative risk and event retention levels contribute positively towards Bryte Insurance’s financial profile.
GCR’s assessment of the insurer’s overall liquidity profile considers the tradeable nature of the interest bearing portfolio, which comprises listed government and corporate bonds. In this respect, on an adjusted basis, liquid asset coverage of average monthly claims and net technical reserves equated to 16 months and 1.8x at FY17 (FY16: 15 months and 1.5x), implying a strong level of overall liquidity. GCR expects liquidity metrics to remain strong over the outlook horizon, although these could be impacted by further operational cash flow absorptions. Furthermore, the insurer reflects a low exposure to high risk investment assets, which equated to 11% of capital at FY17 (FY16: 15%).
These factors are, however, partially offset by Bryte Insurance’s weak overall earnings history, given the large underwriting deficits posted throughout the review period. This has largely been a function of elevated claims experience, as well as reduced premium scale and non-recurring expenses associated with the change in shareholder. Given the improvement in attritional claims experience in recent years, as well as an anticipated normalisation in the expense base, earnings capacity is expected to improve from FY18 onwards, with the combined ratio projected at between 96% and 100%. Furthermore, net profitability is likely to be supported by realised investment income. In this regard, the ability of the insurer to demonstrate a sustained turnaround in earnings capacity is likely to be a key rating consideration over the short to medium term.
The insurer’s competitive position is assessed to be intermediate, with its market share equating to around 3% in FY17. The business mix is fairly diversified and exhibits contained product risk, with the overall business profile viewed to be moderately strong.
The insurer’s standalone credit profile is viewed to benefit from implied shareholder support. Implied support stems from the fact that Fairfax Financial Holdings Limited has indicated its objective to hold Bryte Insurance over the long term. Furthermore, the shareholder maintains a sum of USD2bn in unencumbered assets to be used in the event that any of its subsidiaries are under financial stress.
Upward rating action could materialise over the medium to longer term should the insurer demonstrate a sustained strengthening in earnings capacity. This would need to be supported by risk adjusted capitalisation and liquidity registering within strong ranges. In contrast, the rating is highly sensitive to persistent earnings weakness. Furthermore, downward rating action is likely to follow a reduction in risk adjusted capitalisation or liquidity.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (July 2001)|
|Claims paying ability: AA(ZA)|
|Last rating (August 2017)|
|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 May 2018
South Africa Short Term Insurance Bulletins, 2001 – 2017
Zurich Insurance Company South Africa Limited rating reports, 2001 – 2016
Bryte Insurance rating report, 2017
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.
Bryte Insurance Company 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 Bryte Insurance Company Limited.
The information received from Bryte Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The latest audited financial statements to 31 December 2017
- Four years of comparative audited financial statements to 31 December
- Budgeted financial statements to 31 December 2018
- Year to date management accounts to 30 June 2018
- Quantitative statutory returns to 31 December 2017
- The current reinsurance treaties and programme summary
- Other relevant documents
The rating above was solicited by, or on behalf of, the rated entity, 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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Combined Ratio||Measures the ability to conserve profits through the expense line.|
|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.|
|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.|
|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 Income||The income generated by a company’s portfolio of investments.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Bryte Insurance Company Limited’s rating of A+(ZA); Outlook Stable