Johannesburg, 30 November 2018 — 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. The insurer is the second largest participant in the market, with an 8% share of GWP, and a premium base of around 6.1x the industry average. Despite a moderation in market share in FY18 (a result of strategic emphasis on enhancing business quality), GCR considers Hollard to be well placed to sustain its competitive strength, supported by its highly diversified product offering and brand strength.
GCR views Hollard’s revenue stream to be very well diversified across policyholders and classes of business. In this respect, the insurer occupies a top tier position in six statutory lines of business (based in interim classifications and excluding miscellaneous), each of which reflect material net premium scale.
Hollard’s risk adjusted capitalisation is assessed to be moderately strong, with a large dividend extraction and atypical taxation charge having been offset by reducing underwriting and participation risk charges in FY18. Capitalisation is expected to be sustained at a similar level over the rating horizon, supported by the insurer’s active risk based capital management approach. The reinsurance programme reflects a strong aggregate counterparty credit profile and limits net deductibles to conservative levels against capital.
The insurer has evidenced a moderately strong level of earnings capacity over the review period, with healthy (albeit reducing) investment yields offsetting limited underwriting profitability. In this respect, the five year average underwriting margin equated to –1%, while the corresponding return on equity registered at 21%. Note is, however, taken of the pressure on net profitability in FY18 stemming from an increase in the taxation charge (relating to prior year transactions), which management views to be conservative and sufficiently backdated. Accordingly, a normalisation in near term earnings is premised on the successful turnaround in underwriting performance in FY19, and an absence of further unexpected expense items.
Hollard’s liquidity metrics have been sustained within a moderately strong range, with adjusted cash coverage of average monthly claims and net technical liabilities equating to 1.2x and 9 months respectively at FY18 (FY17: 1x and 8 months). GCR expects key liquidity measures to remain within a moderately strong range, given the insurer’s asset liability matching approach.
Upward rating movement could be supported by a sustained strengthening in underwriting profitability and/or enhanced liquidity. In contrast, the rating is sensitive to sustained earnings pressure and/or a weakening in risk adjusted capitalisation.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (December 2008)|
|Claims paying ability: AA(ZA)|
|Last rating (November 2017)|
|Claims paying ability: AA(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|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 May 2018
South Africa Short Term Insurance Bulletins, 2001 – 2017
Hollard rating reports, 2008 – 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.
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.
The information received from The Hollard Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The latest unsigned financial statements to 30 June 2018
- Four years of comparative audited financial statements to 30 June
- Budgeted financial results to 30 June 2019
- Quantitative statutory returns to 30 June 2018
- The current year reinsurance treaties
- 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
|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.|
|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.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|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.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a more detailed glossary of terms please click here
GCR affirms The Hollard Insurance Company Limited’s rating of AA(ZA); Outlook Stable