Johannesburg, 1 December 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Oakhurst Insurance Company Limited of A-(ZA), with the outlook accorded as Stable. Global Credit Ratings has also affirmed the international scale claims paying ability rating assigned to Oakhurst Insurance Company Limited of BB, with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Oakhurst Insurance Company Limited (“Oakhurst”) based on the following key criteria:
Capitalisation is viewed to be sound, supported by strong risk adjusted capital adequacy. Robust premium growth, coupled with an increase in asset risk associated with a large holding company loan, caused a moderation in capital adequacy metrics at FYE16. This notwithstanding, Oakhurst’s capital management strategy is viewed to support strong risk adjusted capital adequacy, with internal Solvency Capital Requirement (“SCR”) coverage targets expected to be maintained at rating supportive levels over the medium term.
Earnings capacity is viewed to be intermediate. The increasing loss ratio trend over the past two years, coupled with an elevated commission ratio, has resulted in diminishing underwriting surpluses, with the two year average underwriting margin receding to 5%. Given anticipated growth into more commoditised lines of business (which run at lower margins), a degree of profit compression is expected to continue over the short to medium term, with management expecting the loss ratio to be more aligned with historical levels by 2018. Combined with the expected realisation of enhanced scale benefits, this may accommodate improved profit potential over the medium term to moderately strong levels.
Following a R60m loan advancement to the holding company, liquidity softened to a moderately strong level, from the strong profile reflected in prior years. Cash coverage of average monthly claims and technical provisions (inclusive of interest securities) lowered to 5 months and 0.9x respectively (FYE15: 10 months and 1.8x). Going forward, liquidity metrics are expected to remain within a moderate to strong range, given the anticipated stability in investment allocations and active management of balance sheet risk.
Despite being predominantly motor-focused (95% of GWP), the earnings stream is diversified across sub-segments, while note is taken of the policyholder granularity and limited product risk associated with the traditional business lines. Reinsurance is placed with well rated counterparties, while excess of loss (“XoL”) risk and event net deductibles are considered to be prudent.
Oakhurst’s limited market share represents a relative rating weakness. This notwithstanding, GCR considers Oakhurst to be well placed for continued penetration into the core personal lines space, which is expected to be complemented by growth in the direct channel. Furthermore, the ongoing expansion into commercial lines could contribute towards an enhanced competitive profile over the medium to longer term.
Upward rating action could result from the successful execution of strategic objectives, while preserving underwriting profitability. This must be accompanied by improved liquidity, and maintenance of risk adjusted capital adequacy at sound levels. A sustained deterioration in operating performance, or a weakening in liquidity, may trigger downward rating movement.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (January 2015)||Initial rating (January 2015)|
|Claims paying ability: A-(ZA)||Claims paying ability: BB+|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Claims paying ability: A-(ZA)||Claims paying ability: BB|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Susan Hawthorne||Vinay Nagar|
|Senior Credit Analyst||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Oakhurst rating reports, Jan 2015 – Dec 2015
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 ratings were 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Oakhurst Insurance Company Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Oakhurst Insurance Company Limited with no contestation of the rating.
The information received from Oakhurst Insurance Company Limited and other reliable third parties to accord the credit ratings included:
- The latest audited annual financial statements to 28 February 2016
- Four years of audited comparative financial statements to 28 February
- Full year budgeted financial statements to February 2017
- Unaudited year to date management accounts to September 2016
- The quantitative statutory return to February 2016
- 2016/2017 reinsurance treaty summary
- Other related documents
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Benefits||Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.|
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|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.|
|Commercial Lines||Insurance for businesses, professionals, and commercial establishments.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Interest||Money paid for the use of money.|
|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.|
|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.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR affirms Oakhurst Insurance Company Limited’s rating of A-(ZA); Outlook Stable.