Johannesburg, 30 November 2018 — 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 factors:
Strong capitalisation continues to support the rating, with the insurer reflecting sound risk adjusted capitalisation. Restricted capital build and higher market risk caused some dilution in the Solvency Capital Requirement (“SCR”) coverage in FY18, although continuing to trend at the upper end of management’s internal target range. Expected earnings improvement and stability within the investment base is likely to uphold sound SCR coverage over the rating horizon. Nonetheless, GCR views current SCR coverage levels to provide sufficient buffers to sustain the current rating should short term earnings pressure materialise (in the advent of delayed earnings recovery), all else being equal.
Oakhurst’s liquidity is viewed to be strong, providing further credit support. Liquidity metrics were uplifted by an enhanced cash balance of R210m at FY18 (FY17: R130m) achieved through a balance sheet restructuring and a sizeable quota share commission prepayment (viewed as a once off payment). This bolstered adjusted liquidity metrics, with cash coverage of average monthly claims and net technical provisions (inclusive of interest securities) equating to a higher 8 months and 3.0x respectively (FY17: 7 months and 2.5x). A consistent investment approach, coupled with the potential for sound cash flow generation (on the back of improved earnings) is expected to sustain strong medium term liquidity.
Oakhurst’s FY18 earnings were negatively impacted by a deceleration in growth, which coincided with a ramp up in operating costs associated with the direct sales channel (the Dotsure brand) to bolster staff capacity and brand visibility. Accordingly, the operating cost ratio registered at a review period high of 38% in FY18 (five year average: 31%), leading to the first underwriting loss of R0.7m over the review period. Nonetheless, the claims ratio remained contained at 54% in FY18 and within the target band. In GCR’s view, should premium growth materialise as expected, the cost base may revert to more proportionate levels conducive to thin but positive underwriting margins supportive of intermediate medium term earnings capacity. Potential exists for longer term improvement once operating structures are fully bedded down and cost ratios align with historical levels.
Despite being predominantly motor-focused (92% 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. Prolonged earnings strain, 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 2017)|
|Claims paying ability: A-(ZA)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Oakhurst rating reports, 2015-2017
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 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.
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 2018
- Four years of comparative audited financial statements
- Full year budgeted financial statements to February 2019
- Unaudited interim results to 31 August 2018
- Quantitative statutory returns to February 2018
- Other relevant documents
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.
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.|
|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.