Announcements Insurance Rating Alerts

GCR affirms Dotsure’s national scale financial strength rating of A(ZA); Outlook Stable

Rating Action

Johannesburg, 26 August 2021 – GCR Ratings (“GCR”) has affirmed Dotsure Limited’s (“Dotsure”) (formerly Oakhurst Insurance Company Limited) national scale financial strength rating of A(ZA), with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Dotsure Limited Financial strength National A(ZA) Stable Outlook

Rating Rationale

Dotsure’s national scale financial strength rating has been affirmed with a Stable Outlook, reflecting our view that the insurer’s financial profile will be maintained within a moderately strong range over the rating horizon, counterbalancing a limited business profile. Following a corporate transaction on 1 July 2021, Dotsure acquired The Hollard Insurance Company Limited’s (“Hollard”) direct business. In our view, the transaction will have limited impact on the financial profile, given the insurer’s accommodative capital and liquidity structures. Furthermore, we note that the transferred portfolio will, if retained in line with expectations, mostly replace discontinued traditional intermediated business as the insurer strengthens its direct insurance model.

Although Dotsure’s regulatory Solvency Capital Requirement (“SCR”) moderated due to the cancellation of the quota share arrangement with Swiss Re, risk adjusted capitalisation remained sound, supporting the insurer’s rating. In this regard, SCR coverage registered at 1.5x at FY21 (FY19: 1.8x). Note is taken that capitalisation strength is somewhat offset by a comparatively high risk investment portfolio, exhibiting concentration to related party investments, which reduces capital quality. In GCR’s view, capitalisation is likely to be maintained within the same range taking into account the likely balance between low premium growth and slow internal capital generation trends over the medium term.

Dotsure’s liquidity is considered strong, supported by a relatively high stressed financial assets portfolio. Notably, liquidity is still viewed to be strong even in the absence of the quota share prepayment and after applying GCR’s internal stresses. As such, stressed financial asset coverage of net technical liabilities registered at 5.6x (FY20: 4.2x), albeit noting relatively low operational cash coverage of 6 months at FY21 (FY20: 5 months). Operational cash coverage continues to be impacted by a high-cost base associated with investment in the direct sales channel. Liquidity metrics are expected to be maintained at strong levels over the outlook horizon.

Earnings is viewed to be sound, supported by moderately strong underwriting performance and sound investment income. Underwriting profitability is a result of a relatively competitive claims ratio, which somewhat offsets the increasing operational cost base. Note is taken of the moderation of the underwriting margin because of a lower net premium base. However, our view is that this could be corrected with the acquisition of the new business from Hollard. In this respect, the underwriting margin equated to 1.6% in FY21 (FY20: 5.3%), while the return on revenue equated to 6.6% (FY20: 9.5%). Going forward, we expect earnings metrics to remain within a moderately strong range.

The rating takes into account the entity’s limited business profile, which is a function of low market share and geographic diversification, while also noting high product concentration to motor. We note that Dotsure’s premium base has been shrinking over the last two years, however, this has been countered by the acquisition of premiums from Hollard. Although premiums are concentrated within the motor book, we acknowledge the diversification that is coming from the growing miscellaneous book. Further, we positively consider the policyholder granularity associated with the direct business.

Outlook Statement

The Stable Outlook reflects expectations that underwriting profitability may benefit from a higher NEP, leading to increased scale efficiencies, while investment income will remain sound. GCR expects the SCR coverage to be managed around 1.5x and stressed financial assets coverage of technical liabilities to be above 3x over the outlook horizon.

Rating triggers

The rating may be upgraded following an improvement in the business profile and /or maintenance of liquidity strength while solvency metrics remain within their current range. Conversely, downward rating pressure may arise from sustained earnings strain as well as downward pressure on capitalisation resulting in SCR coverage registering below 1.5x.

Analytical Contacts

Primary analyst Sylvia Mhlanga Senior Analyst: Insurance Ratings
Johannesburg, ZA SylviaM@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, August 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings History

Dotsure Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(ZA) Stable January 2015
Financial strength Last National A(ZA) Stable July 2020

Risk Score Summary

Rating Components and Factors Risk score
Operating environment 15.00
Country risk score 7.00
Sector risk score 8.00
Business profile (3.00)
Competitive position (2.00)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 1.50
Earnings 0.25
Capitalisation 0.50
Liquidity 0.75
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 13.50

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Primary Market The part of the capital markets that deals with the issuance of new securities.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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 POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. 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. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received is considered adequate and has been independently verified where possible.

The information received from the rated entity and other reliable third parties to accord the credit rating included:

  • Management accounts to 30 June 2020
  • Four years of comparative audited financial statements;
  • Annual and Quarterly quantitative statutory returns at 31 December 2020 and 31 March 2021; and
  • Other relevant information
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