Johannesburg, 15 December 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to The Hollard Insurance Company Limited of AA(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to The Hollard Insurance Company Limited (“Hollard”) based on the following key criteria:
The rating is underpinned by Hollard’s very strong competitive position, which is expected to be sustained on the back of robust organic growth (budgeted GWP growth of 10% in FY16). Furthermore, the potential Regent group transaction could significantly enhance scale and synergies within Hollard’s personal lines portfolio, providing a source of relatively high margin growth going forward.
GCR views Hollard’s revenue stream to be very well diversified across products, buying segments and procurement channels. Furthermore, note is taken of the insurer’s increasing scale in the specialist segments, which contributes towards enhanced risk diversification. The relatively large niche component has assisted in maintaining sound cross cycle technical profitability. However, this is offset by the higher operational costs associated with the partnership focused business model, with Hollard’s underwriting margin trailing that of its competitors (although exhibiting a lower degree of volatility). In this respect, earnings capacity is supported by the large investment portfolio, which has contributed towards strong returns on revenue throughout the review period.
The large exposure to group and other insurance related investments has historically introduced a heightened degree of systemic risk. In this regard, the further sale of a large portion of strategic investments is expected to continue to enhance asset quality over the short to medium term, and is favourably viewed from a rating perspective. Robust expansion of the risk base has resulted in compression in capital adequacy on a nominal and risk adjusted basis. Nevertheless, GCR expects the insurer’s solvency to benefit from continued balance sheet restructuring and the active capital management framework.
Key liquidity measures have been sustained at moderate to strong levels, and are expected to be maintained within a sound range, given the insurer’s active asset liability matching approach. The reinsurance programme reflects a strong counterparty credit profile and limits net deductibles to conservative levels against capital.
A strengthening in liquidity and capital flexibility through de-risking of the investment portfolio, together with enhanced underwriting headroom, could result in an upward rating adjustment. In contrast, a reduction in risk adjusted capitalisation or liquidity to levels that are no longer within GCR’s parameters for the current rating, or a protracted reduction in earnings capacity, could give rise to a downward rating movement.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2008)|
|Claims paying ability: AA(ZA)|
|Last rating (December 2014)|
|Claims paying ability: AA(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Hollard rating reports, 2008-2014
RATING LIMITATIONS AND DISCLAIMERS
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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.|
|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.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Systemic Risk||The risk inherent to the entire market or an entire market segment.|
|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
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.
The Hollard 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 The Hollard Insurance Company Limited with no contestation of the rating.
The information received from The Hollard Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results to 30 June 2015
- Four prior years of comparative audited financial results to 30 June
- Unaudited management accounts to 30 September 2015
- Budgeted financial accounts to 30 June 2016
- Quantitative statutory return to 30 June 2015
- The current year reinsurance treaties
- 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.
GCR affirms The Hollard Insurance Company Limited’s rating of AA(ZA); Outlook Stable.