Announcements Insurance Rating Alerts

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

Rating Action

Johannesburg, 6 March 2020 – GCR Ratings (“GCR”) has affirmed The Hollard Insurance Company Limited’s (“THIC”) national scale financial strength (formerly claims paying ability) 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

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for THIC was placed ‘Under Criteria Observation’. GCR has finalised the review under the Criteria for Rating Insurance Companies, May 2019. As a result, the rating has been reviewed in line with the new methodology, and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The rating on THIC reflects the credit strengths and weaknesses of the Hollard insurance group (including The Hollard Life Assurance Company Limited, Hollard Specialist Insurance Limited and Hollard Specialist Life Limited). THIC is a core part of the insurance group, contributing to 56% of total GWP. We have insulated the insurance group from the rest of the parent group’s operations, which is viewed to be an investment holding company.

The group’s credit profile benefits from a strong competitive position in the short term South African insurance market and diverse premium mix with good revenue scale across multiple lines of business which support sound profitability. Capitalisation is viewed to be adequate, while a higher weighting to non-cash assets constrains liquidity. The group is expected to consolidate its existing premium base, while shifting focus towards more specialist lines that may provide earnings resilience in the low growth, competitive South African insurance landscape, which should support a stable business and financial profile over the medium term.

The group has an entrenched market position in the South African insurance industry, underpinned by a top tier position in the short term sector (market share of around 9% at FY19), while also being a fairly sized player in the long term market (market share of around 1.5%). The group’s short term and long term businesses have good brand visibility, and are the key revenue contributors to the group, which recorded good overall premium scale (FY19: R20.2bn). Furthermore, the short term business has material scale in multiple business lines that is expected to support market position and premium diversification over the medium term.

The business mix is largely weighted towards motor and property lines (representing approximately 50% of total GWP), broadly in line with industry peers. However, premium diversification is supported by a large life portfolio (FY19: just over R7bn) which is short term in nature and viewed to carry lower product risk (given the prevalence of linked policies) as well as strong market penetration in multiple lines of specialist business, providing good scale and premium stability. Geographic diversification is viewed to be limited and constrains the factor assessment.

Earnings are positive to the rating, as the group operating margin tracked within a stable range just under 11% over the past two years. Profit generation is largely derived from investment income, which augments thin underwriting margins. The short term business has posted a claims improvement recently, which has absorbed the impact of some losses due to constrained premium growth (total expense ratio rose to 45% in FY18, versus prior three year average of 42%) while the life book’s (excluding specialist life) claims have deteriorated over the past two years (FY19: 41.6%; FY18: 40.9%; prior three year average: 32%). Following the tax restatement in FY18, bottom line profitability improved in FY19 as the tax expense normalised. Management do not anticipate further tax restatements going forward, with profit metrics expected to trend within a good range, although potential for CAT events could see a reversal in the short term entity’s claims ratio to around the historical average of 58% (FY19: 53%). As such, claims management will continue to be a key profit driver over the coming years, amongst other cost initiatives underway at group level.

Group capitalisation is viewed to be adequate, with targeted Solvency Capital Requirement (“SCR”) coverage broadly in line with industry peers. Underwriting and market exposure are the key drivers of SCR movement, with the group holding a high weighting of non-cash assets on balance sheet. Tier II debt is utilised to support regulatory SCR coverage, although leverage and interest coverage ratios are robust and overall debt is not viewed to negatively impact the assessment at this stage. GCR expects the group to maintain adequate capitalisation going forward, with good profit generation and capital management likely to support targeted SCR metrics over the medium term.

Liquidity is weighed down by a fairly high risk investment portfolio, of which 44% is classified as unlisted investments (although a large portion of that relates to liquid unit trusts which are viewed to cover unit linked policies). As a result, liquidity metrics are adequate, with stressed asset coverage of technical provisions (after adjusting for unit linked policies) registering around 1x. GCR does not expect the investment portfolio to change materially over the rating horizon as investments are considered in relation to broader group objectives, and certain illiquid strategic investments are unlikely to be sold in the near term (such as preference shares and unlisted strategic investments). There could be some liquidity relief over the medium term as the disposal of the remaining foreign insurance subsidiary concludes while there is also potential for good operational cash flow generation that could have a slight positive impact on liquidity metrics should these funds contribute to cash build.

Outlook Statement

The stable outlook reflects GCR’s expectations that the group will sustain improved earnings on the back of ongoing claims remediation in the short term and long term business, absorbing the potential cost impact of soft premium growth and moderated investment income (due to the constrained economic environment). In turn, good bottom line profitability and prudent capital management will support SCR at targeted levels above 1.3x over the medium term, while scope for slight liquidity improvement is possible given the pending subsidiary sale and positive cash flow generation capacity.

Rating Triggers

The rating may be upgraded should there be a strengthening in liquidity while sustaining improved earnings over the medium term. Negative rating pressure could emanate from a weakening in earnings or liquidity.

Analytical Contacts

Primary analyst Vinay Nagar Senior Analyst
Johannesburg, ZA Vinay@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Head of Group 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, January 2020
GCR Insurance Sector Risk Scores, January 2020

Ratings History

The Hollard Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National AA(ZA) Stable December 2008
Last AA(ZA) Stable November 2018

Risk Score Summary

Risk score
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
Business Profile 1.00
Competitive position 0.5
Premium diversification 0.5
Management and governance 0.0
Financial profile 0.00
Earnings 0.50
Capitalisation 0.00
Liquidity -0.50
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 17.25

Glossary

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.
Subordination The prioritising of the payment of interest and principal payments to tranches (senior, junior etc. Senior tranches are paid before junior tranches.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Turnover The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.
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.
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.
Subordination The prioritising of the payment of interest and principal payments to tranches (senior, junior etc. Senior tranches are paid before junior tranches.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Turnover The total value of goods or services sold by a company in a given period. Also known as revenue or sales. Turnover can also refer to the total volume of trades in a market during a given period.
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.

For a detailed glossary of terms utilized in this announcement please click here

SALIENT POINTS OF ACCORDED RATING

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

The credit rating has been disclosed to The Hollard Insurance Company Limited. The rating above was solicited by, or on behalf of, the rated entities, and therefore, GCR has been compensated for the provision of the rating.

The Hollard Insurance Company Limited participated in the rating process via face-to-face 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 financial results to 30 June 2019;
  • Four years of comparative audited numbers
  • Other related documents.


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