Johannesburg, 12 Oct 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to THI Insurance (Private) Limited at BBB-(ZW), with the outlook accorded as Positive. The rating is valid until September 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to THI Insurance (Private) Limited (“THI”) based on the following key criteria:
The Positive outlook is premised on expectations of the insurer’s profitability measuring in line with GCR’s view of medium term earnings capacity over the rating horizon, while successfully transitioning and bedding down operations, following the recent change in shareholding structure. The latter saw a management buyout of Tetrad Holdings Limited’s (“THL”) ownership of the company. The structure of the buyout saw all receivables from, and exposures to, THL, setoff against the purchase price. As a result, THI (which is now 100% owned by management) no longer has exposure to THL by way of either direct balance sheet exposure, or ownership interference risk. This has eliminated a previous rating constraint.
Rating support emanates from relatively strong levels of risk adjusted capitalisation, albeit with a reduction in the capital base to USD3.5m at 10M F15 (FYE14: USD5.2m), following the USD2.7m setoff (relating to impairment losses on loans and other investments), which resulted in an overall net loss. As such, the international solvency margin lowered to 116% (FYE14: 162%), albeit remaining strong. GCR expects solvency to remain within a strong range, trending above 100%, supported by utilisation of proportional reinsurance. The insurer’s moderately strong level of risk adjusted capitalisation provides financial tolerance for potential high severity hail claims, taking into account the large maximum net deductible of USD1.1m.
THI has recorded strong levels of profitability over the past two years, underpinned by low claims experiences in the tobacco hail portfolio, and further supported by some diversification into new general insurance books. The underwriting profits over the past two years (cumulatively amounting to approximately USD2.9m, compared to less than USD0.1m for the three prior years combined) have contributed materially to the insurer’s enhanced capital and liquidity positions. Nevertheless, the reduction in THI’s year to date profitability illustrates the inherently high level of profit volatility associated with hail insurance.
Enhanced profitability translated into very high cash flow generation over the past two years. Furthermore, the insurer’s relatively conservative investment philosophy supported strong liquidity, albeit a reduction in cash evidenced as at 10M F15 (given the settlement of liabilities due to THL) has lowered key liquidity metrics. Management plans to maintain a low risk investment approach going forward, in support of its expansionary medium term business plan. As at 10M F15, all liquid funds (USD1.6m) were held by institutions exhibiting strong financial profiles.
THI’s established niche position as the leading domestic tobacco hail insurer (with an approximate market share of between 55% and 65%) lends support to the rating. This has been underpinned by linkages with strong reinsurance counterparties, as well as long standing relationships with farmers and tobacco merchants.
Cognisance is taken of THI’s broadening business mix, which may serve to reduce concentration to agriculture insurance. The elevation of execution risk in this regard is noted, as the benefits of the strategy are likely to fully accrue over the medium to long term, once the non-hail book reaches critical mass.
The rating may be upgraded if the insurer evidences sustained operational stability, while maintaining through-the-cycle profitability within a strong range. This would need to be supported by liquidity rebounding to strong levels. Conversely, a downgrade may result from a deterioration in risk adjusted capital levels and/or liquidity metrics. Furthermore, a sustained weakening in earnings capacity, or a material loss in market share may result in negative ratings pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2012)|
|Claims paying ability: BB+(ZW)|
|Last rating (September 2014)|
|Claims paying: BBB-(ZW)|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Fidelis Masheka|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
THI rating reports, 2012-2014
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.
THI Insurance (Private) 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 THI Insurance (Private) Limited with no contestation of the rating.
The information received from THI Insurance (Private) Limited and other reliable third parties to accord the credit rating included:
- The audited financial statements to 30 September 2014
- 4 years of comparative audited numbers
- Unaudited interim results to 31 July 2015
- Budgeted financial statements for 2015
- 2015 reinsurance cover notes, and
- Other related 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.
|Assets||The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Capacity||The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss Ratio||The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|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.|
|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.|
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