Johannesburg, 22 November 2019 – GCR Ratings (“GCR”) has revised Oakhurst Insurance Company Limited’s (“Oakhurst”) national scale financial strength (formerly claims ability) rating to A(ZA) from A-(ZA), with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Oakhurst Insurance Company Limited||Financial strength||National||A(ZA)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Oakhurst was placed ‘Under Criteria Observation’. GCR finalised the review for Oakhurst under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Oakhurst has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
Oakhurst’s national scale financial strength rating reflects a moderately strong financial profile, which is counterbalanced by a limited business profile.
Oakhurst’s liquidity is strong, as evidenced by stressed financial asset coverage of net technical liabilities of 4.3x (FY18: 3.3x), albeit noting relatively low operational cash coverage of 4 months at FY19 (FY18: 5 months). Operational cash coverage has been impacted by a high cost base associated with the direct sales channel (the Dotsure brand). Liquidity metrics are expected to be maintained at similar levels over the rating horizon, with a high cash balance and low reserves supporting high coverage of net technical liabilities, while a persistently high cost base could limit the operational cash coverage ratio.
The insurer’s risk adjusted capitalisation is viewed to be moderately strong, having been maintained within a similar range over the review period. Note is taken of a slight increase in underwriting risk in FY19, owing to an increase in premiums. However, this is likely to be reversed in the short term due to a recent reduction in the premium base. Capitalisation strength is somewhat offset by a comparatively higher risk investment portfolio, noting concentration to related party investments of R99m (38% of capital), which reduces capital quality to an extent. In GCR’s view, capitalisation is likely to be sustained at moderately high levels over the outlook horizon, supported by full profit retention and stability in investment returns.
Underwriting performance registered an improvement in FY19, supported by a larger premium base that provides scale efficiencies. In this respect, the five year underwriting margin equated to 4.4% (FY19: 6.7%; FY18: -0.1%), while the five year return on revenue equated to 5.6% (FY18: 7.6%; FY17: 2.7%). Going forward, earnings are expected to be rating positive, although potential moderation in the premium base could lead to loss of scale efficiencies and consequently moderate underwriting performance.
The rating further takes into account the entity’s limited business profile, which is a function of low market share and geographic diversification, while also noting high product concentration to motor. Oakhurst’s relative market share equated to a low 0.5x at FY19, with motor contributing approximately 81% to total GWP. However, traction in the Dotsure segment (largely through the sale of pet insurance) supported improving premium diversification in recent years. Nonetheless, the recent moderation in premiums through loss of a UMA may negatively affect the insurer’s competitive position, in the absence of any significant offsetting growth in the overall premium base.
The stable outlook reflects expectations of stable capitalisation and liquidity strength, while factoring in potential for underwriting profitability to remain at similar levels over the outlook horizon.
Positive rating action may stem from an enhanced business profile while all other credit protection metrics remain within moderately strong ranges. Conversely, downward rating pressure may arise from prolonged earnings strain and/or a persistent deterioration in asset quality.
|Primary analyst||Sylvia Mhlanga||Insurance Analyst|
|Johannesburg, ZA||Sylviam@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Insurance Sector Risk Scores, November 2019|
Oakhurst Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(ZA)||Stable||January 2015|
Risk Score Summary
|Country risk score||7.50|
|Sector risk score||8.75|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.|
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Captive Insurance Company||A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|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.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.|
|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.|
|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.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|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.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinstatement||The resumption of coverage under a policy, which has lapsed.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
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 rated entities, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Oakhurst Insurance Company Limited. 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.
Oakhurst Insurance Company Limited participated in the rating process via face-to-face 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 Oakhurst Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as at 28 February 2019;
- Four years of comparative audited financial statements to 28 February;
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 30 October 2019; and
- Other relevant documents.