Johannesburg, 07 December 2016 — 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 Stable. The rating is valid until September 2017.
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:
THI’s capital base amounted to USD3.1m as at September 2016 (FYE15: USD2.5m; FYE14: USD5.2m). The slight rise in capital was facilitated by sound internal capital generation, following the substantial capital reduction emanating from post management buy-out write offs and erosion from normal operations in FY15. As such, risk adjusted capitalisation rose to a healthy level, albeit remaining lower than the very strong levels recorded previously. Going forward, risk adjusted capitalisation is expected to measure within a sound range, underpinned by a projected improvement in internal capital generation and relatively well contained insurance risk volumes. Note is taken of management’s efforts to capitalise the business in FY17 through an amalgamation with the holding company, offering partial mitigation to possible solvency risks emanating from operational volatility.
GCR views THI’s cross cycle earnings capacity to be moderately strong, albeit exposed to substantial volatility associated with hail business, and relatively limited scale efficiencies to absorb the cost base. In this respect, the review period average underwriting margin equated to 19% (FY15: -17%; FY14: 55%). This was a function of very high commission recoveries (review period average: 38%), stemming from low loss ratios in select years. Net profitability measured at an intermediate level, reflecting the impact of impairment losses (USD2.7m) registered in FY15. Given this, the review period average ROE lowered to 11%. GCR expects earnings capacity to remain volatile, given the profit variability inherent in hail business.
THI’s cash and equivalents amounted to USD1.1m as at September 2016 (FYE15: USD0.9m; FYE14: USD3.0m). The reduction in liquid assets is a result of the write off of amounts owed to THI. Going forward, management plans to maintain a low risk investment approach, to support strong liquidity. In GCR’s view, liquidity is likely to remain sound, underpinned by healthy operating cash flow generation and supported by conservative asset allocation.
GCR views the insurer’s business profile to be intermediate, given the insurer’s strong competitive position, which is partially offset by a concentrated earnings profile. In this respect, hail business represents the bulk (80%) of gross premiums. This is largely due to the fact that THI is the leading domestic tobacco hail insurer with a significant market share. The niche position has been underpinned by linkages with strong reinsurance counterparties, as well as long standing relationships with commercial farmers and tobacco merchants. Cognisance is taken of the expected broadening of the business mix, which may serve to reduce concentration to hail insurance. The elevation of execution risk in this regard is noted, as the benefits of the strategy may only fully accrue over the long term, once the non-hail book reaches critical mass.
Reinsurance arrangements are placed with well rated counterparties. Overall, maximum exposure to losses is viewed to be high relative to capital.
The rating may be upgraded if the insurer registers an improved underwriting performance, which positively impacts on liquidity and capitalisation and/or through an adequate capital injection. Conversely, a downgrade may result from either a severe or sustained reduction in underwriting performance, or a weakening in liquidity and capitalisation.
NATIONAL SCALE RATINGS HISTORY |
Initial rating (August 2012) |
Claims paying ability: BB+(ZW) |
Outlook: Stable |
Last rating (September 2015) |
Claims paying: BBB-(ZW) |
Outlook: Positive |
ANALYTICAL CONTACTS
Primary Analyst | Committee Chairperson | |
Godfrey Chingono | Marc Chadwick | |
Credit Analyst | Sector Head: Insurance Ratings | |
(011) 784-1771 | (011) 784-1771 | |
godfreyc@globalratings.net | chadwick@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
THI rating reports, 2012-2015
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 31 December 2015
- 4 years of comparative audited numbers
- Unaudited interim results to 30 September 2016
- Budgeted financial statements for 2016
- Actuarial report to 31 December 2015
- 2016 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. |
For a more detailed glossary of terms/acronyms please click here
GCR affirms THI Insurance (Private) Limited’s rating at BBB-(ZW); Outlook Stable