Johannesburg, 09 March 2021 – GCR Ratings (“GCR”) has affirmed The Hollard Insurance Company Limited’s (“THIC”) national scale financial strength rating of AA(ZA), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|The Hollard Insurance Company Limited||Financial Strength||National||AA(ZA)||Stable Outlook|
The rating affirmation balances Hollard group’s healthy business profile and solvency against high risks to earnings and liquidity, arising from the operating environment. THIC is the group’s core operating entity contributing 57.5% of gross premiums in FY20, anchoring the group’s competitive position. Hollard Life Assurance Company Limited contributed 34.1% of gross premiums in FY20, and together with ancillary specialist business units provides credit stabilising diversification. Despite the escalation in earnings and liquidity risk due to business interruption claims, the rating factors in the group’s capacity to absorb a level of near-term stress.
The Hollard group’s credit profile is bolstered by an entrenched market position, underpinned by a strong position in the South African short-term sector (market share of around 8%), and a fairly competitive long-term book (market share of around 4%). The group exhibits good brand visibility, which contributed to stable premium scale of around R20bn over the past two years. Furthermore, the short-term business evidences material premium scale in multiple business lines that is expected to support market position and premium diversification over the medium term, adding to a proportionately sizeable life book. Going forward, emphasis on specialist lines is expected to offset competitive pressure in the mainstay intermediated business, supporting a stable business profile over the medium term.
Earnings capacity could moderate from the fairly stable intermediate range historically, due to net margin compression from business interruption claims provisions in FY20 and 1H F21, as well as comparatively high susceptibility to balance sheet risks. However, GCR expects resilience in the high margin specialist products in both short-term and long-term segments to limit the downside to FY20 operating profit margins of 4.2% (FY16-FY19: above 10%). Earnings management is, therefore, a key rating consideration over the outlook period, given uncertainty over the ultimate value of business interruption claims.
The capital base adequately caters for aggregate risks borne by the group, with both the solvency capital requirement (“SCR”) coverage ratio and GCR capital adequacy ratio measuring above 140% over the past two years, supported by sound capital generation. While GCR notes less forbearing solvency support from subordinated debt (partially qualifying as Tier II capital), the current debt to equity ratio of around 15% is viewed to be well contained relative to peers. However, market risk in the short-term business and high dividends to preference shareholders (82% of aggregate net profits over the past two years) represent key downside risks.
The group’s intermediate liquidity is supported by strong liquidity metrics in the life business, given high capital buffers relative to insurance liabilities. However, potential liquidity pressures from risky assets in the short-term business present risks to the factor’s assessment. Going forward, GCR expects liquidity metrics to remain within the current range, albeit sensitive to the combined impact of dividend payments and possible operating cash flow volatility over the short term.
The Stable outlook reflects credit support from the group’s business profile and solvency, which is sufficient to offset short term downside risks to earnings and liquidity. The final claims amount on business interruption claims remains uncertain; however, the impact is expected to be relatively contained, especially if earnings remediation measures on the rest of the book are well executed.
The rating could be upgraded over the medium term if solvency ratios are sustained within the current range, while demonstrating sufficient control over earnings. Negative rating pressure could arise from a continued deterioration in earnings or a reduction in liquidity beyond expected levels.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, February 2021|
|GCR Insurance Sector Risk Scores, February 2021|
The Hollard Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA(ZA)||Stable Outlook||December 2008|
|Financial strength||Last||AA(ZA)||Stable Outlook||March 2020|
Risk score summary
|Rating components and factors||Risk score|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|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.|
|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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Upstream||A term referring to the exploration and extraction of a commodity, in contrast with the downstream manufacturing and processing.|
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 was based solely on the merits of the 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 was considered adequate and has been independently verified where possible. The information received from The Hollard Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited company and group financial statements to 30 June 2020;
- Four years of comparative company and group audited financial statements to 30 June;
- Unaudited company and group interim results to 30 September 2020;
- Company and group statutory returns to 30 June 2020;
- Budgeted company financial statements to 30 June 2021;
- Other related documents.