Johannesburg, 30 November 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Oakhurst Insurance Company Limited of A-(ZA), with the rating outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Oakhurst Insurance Company Limited (“Oakhurst”) based on the following key criteria:
Oakhurst’s national scale claims paying ability rating is underpinned by the insurer’s sound capitalisation, which is projected to be sustained going forward, albeit with slight dilution expected following the planned balance sheet restructuring in FY19. Earnings capacity, a historical rating strength, has come under pressure over the past three years, and is likely to remain subdued over the short term, with potential profit enhancement dependent upon execution of strategic objectives. Furthermore, liquidity strength has also moderated over the past two years, albeit expected to remain within a strong range going forward. While GCR expects the insurer to maintain stability in the credit profile through the expansionary phase, the combined impact of the aforementioned factors point to a slight shift in the insurer’s overall credit profile (relative to the start of the review period). As such, the management of earnings is expected to form a key rating consideration going forward, particularly in view of the moderation in key credit protection metrics.
The rating is supported by sound risk adjusted capitalisation, which has been a function of contained underwriting and market exposure. Furthermore, barring FY16, retained profits have registered at fairly consistent levels (at around R34m), driving sound capital build over the review period, with the capital base growing at a healthy four year annual compound rate of 21%, ending the year on R218m. Going forward, risk adjusted capitalisation is expected to evidence some dilution, given the potential on take of higher market exposure. However, risk adjusted capitalisation is likely to be maintained within a sound range over the short term, above internal target levels.
Liquidity remained strong, with the insurer’s cash coverage of net technical provisions being maintained above 1.5x throughout the review period (FY17: 1.8x). Further liquidity support is derived from the fairly tradable interest securities portfolio, serving to underpin an overall strong liquidity assessment. The planned balance sheet restructuring in FY19 is not expected to have a material impact on liquidity over the short term with cash coverage of technical liabilities likely to be maintained above 1.5x. Furthermore, comparatively limited cash coverage of average monthly claims is mitigated in part by the short tail and contained net deductible of insured risks.
Recent upward pressure on claims, coupled with a fairly consistent cost structure, has constrained earnings capacity to intermediate levels, and is likely to remain pressured over the rating horizon. The underwriting margin, which has historically underpinned healthy earnings, averaged a subdued 5% over the past three years (FY17: 6%; review period average: 9%), and is expected to soften to 4% in FY18. As such, sustained medium term earnings strain may exert negative pressure on the insurer’s credit profile, with the rating expected to incorporate a higher degree of sensitivity to the earnings capacity assessment.
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 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.
Upward rating action could result from the successful execution of strategic objectives, leading to improved underwriting profitability. This must be accompanied by a strengthening in liquidity, and maintenance of risk adjusted capital adequacy at sound levels. A sustained deterioration in operating performance, or a weakening in liquidity or capitalisation, may trigger downward rating movement.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (January 2015)|
|Claims paying ability: A-(ZA)|
|Last rating (November 2016)|
|Claims paying ability: A-(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Oakhurst rating reports, 2015-2016
RATING LIMITATIONS AND DISCLAIMERS
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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.
Oakhurst 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 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 rating included:
- The audited financial statements to February 2017
- Four years of comparative audited financial statements
- Full year budgeted financial statements to February 2018
- Unaudited interim results to 31 August 2017
- Quantitative statutory returns to February 2017
- Other relevant documents
The rating above was solicited by, or on behalf of, the rated client, 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
|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.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|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.|
|Interest||Money paid for the use of money.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Rating Horizon||The rating outlook period|
|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.|
|Short Term||Current; ordinarily less than one year.|
|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.