Announcements Insurance Rating Alerts

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

Rating action

Johannesburg, 07 March 2022 – 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

Rating rationale

The rating affirmation reflects Hollard group’s healthy business profile and reducing earnings risk due to subsiding claims pressure from the Covid-19 pandemic, especially on the mortality book. Solvency levels have been maintained within a healthy range, supported by conservative investing and limited growth, with persistence in the dynamics of both factors and a possible rebound in earnings generation likely to reduce downside risks to liquidity over the medium term. THIC is the core operating entity of the Hollard group (comprising of Hollard Holdings (Pty) Limited and its subsidiaries), contributing 58.9% (FY20: 57.5%) of gross premiums, thus fully accessing the group’s credit profile.

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 with a stable market share of around 1%. The group exhibits good brand visibility reinforced by multiple partner businesses, which contributed to a stable premium scale of around R20.5bn over the past two years. Furthermore, the short-term conventional business evidences material premium scale in multiple business lines that is expected to support market position and premium diversification over the medium term, complemented by a proportionately sizeable conventional life book. In addition, the group holds presence in the cell insurance space through high quality promoter and cell books that introduce good diversification, allowing it to capture a wide spectrum of risk transfer arrangements. 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.

The group’s earnings displayed a volatile trend during the review period, reflecting margin compression by contingency business interruption claims (“CBI”) on the short-term business, compounded by elevated mortality losses on the life book. Notably, the direct life book suffered significant mortality claims with the group’s adjusted three-year operating margin and return on revenue reducing to 3.4% and 0.9% (FY20: 6.7% and 1.8%) respectively, albeit measuring in line with expectations. Going forward, we expect a normalisation in the claiming trend to increase THIC’s underwriting margin towards the 4% to 7% (FY21: -0.7%; FY20: 1.8%) internal target range, while the operating margin at Hollard Life Assurance Company Limited (“HLAC”) is expected to turnaround in FY22 (FY21: -10.7%; FY20: -4.7%), potentially resulting in a recovery in group net profits after partner business appropriations to above breakeven level in FY22. The specialist businesses, which contributed significantly to group profits over the past three years, are expected to continue registering double digit returns on revenue underpinning the group’s earnings resilience.

The Hollard group maintained the group SCR cover above 1.5x over the past two years, despite registering net losses after appropriations to business partners. This was due to restrained exposure to underwriting risks, which alleviated solvency pressures after a consecutive deterioration in the group’s capital base to R6.4bn (FY20: R6.8bn) and the impact of lapse risk charges on Hollard Life Solutions’ (HLAC and Hollard Specialist Life Limited) policies. The group’s four licences registered SCR ratios above 1.3x over the past two years, with the trend likely to be maintained over the medium term in line with our projection of improved internal capital generation and continued slow premium growth.

The group’s intermediate liquidity benefits from low insurance contract technical reserves on the life book, with select years registering negative reserves. Furthermore, the investment portfolio on the short-term business is mostly invested in unit trust and unit linked investments, which are predominately placed in liquid assets. Liquidity metrics are expected to range between 1.5x and 2x over the medium term, while operational cash coverage is likely to vary within the 7 to 12 months range, albeit sensitive to preference shareholders’ dividend payments should the group’s direct mortality book remain less cash generative.

Outlook statement

The Stable Outlook expresses our view that the group’s credit profile is fully anchored within the current rating range, supported by a stable business profile. The current slow gross premium growth is not seen to materially alter the business profile assessment over the medium term. The group’s profitability deteriorated over the past two years, but largely in line with industry trends, and given a stable business profile, we believe there is scope for earnings to recover to historical levels. Capitalisation and liquidity metrics are also expected to fluctuate within the current ranges.

Rating triggers

The rating could be upgraded over the medium term if solvency ratios are sustained within the current range and further improvements in liquidity are registered, 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.

Analytical contacts

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, January 2022
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, December 2021
GCR Insurance Sector Risk Scores, December 2021

Ratings history

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 2021

Risk score summary

Rating components and factors Risk score
Operating environment 15.00
Country risk score 7.00
Sector risk score 8.00
Business profile 1.00
Competitive position 0.50
Premium diversification 0.50
Management and governance 0.00
Financial profile 0.25
Earnings 0.25
Capitalisation 0.25
Liquidity (0.25)
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total score 16.25

Glossary

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 2021;
  • Four years of comparative company and group audited financial statements to 30 June;
  • Unaudited company interim results to 31 December 2021;
  • Company and group statutory returns to 30 June 2021;
  • Hollard Holdings (Pty) Limited’s Own Risk and Solvency Assessment Report to 30 June 2021;
  • Other related documents.


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