Announcements

GCR upgrades THI Insurance (Private) Limited’s rating to BBB-(ZW); Outlook Evolving

Johannesburg, 19 December 2014 — Global Credit Ratings has upgraded the national scale claims paying ability rating assigned to THI Insurance (Private) Limited to BBB-(ZW); with the outlook accorded as Evolving. The rating is valid until September 2015.

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:

GCR has upgraded THI’s national scale claims paying ability rating by one notch to BBB-(ZW), on the back of material improvements registered in the key credit rating factors of profitability, capitalisation, and liquidity. The Evolving outlook reflects potential for the rating to strengthen or weaken over the outlook horizon, which is largely dependent on the outcome of developments pertaining to shareholder Tetrad Holdings Limited (“THL”), which in turn is impacted by the financial challenges of Tetrad Investment Bank.

Profitability has been recorded at very strong levels over the past two years, owing to the low claims experience in the tobacco hail portfolio, with additional support from the new general insurance books. The combined underwriting profit surpluses over the past two years (amounting to approximately US$2.7m, compared to less than US$0.2m for the three prior years combined) have contributed materially to the insurer’s enhanced capital and liquidity positions. THI’s hail-driven business model gives rise to an inherently high level of profit volatility, nevertheless. Accordingly, GCR has factored a long-run aggregate loss ratio of 65% into our cross-cycle profit outlook for the company over the rating horizon, with a tolerance for a strained single-year loss ratio of between 110% and 120%. Note is taken of the stop loss treaty that takes effect at a loss ratio of 200%.

Enhanced profitability has translated into very high cash flow generation over the past two years. Furthermore, the insurer’s relatively conservative investment philosophy is supportive of adequate liquidity metrics. Management plans to maintain a low risk investment approach going forward, in support of its expansionary medium term business plan. Liquid placements outside of the group to the value of US$2.3m are viewed to offer a degree of risk insulation.

Capitalisation is viewed to be solidifying, and a relative strength to the rating. International solvency is expected to remain robust, trending over 100%. The insurer utilises proportional reinsurance to support solvency, leveraging linkages with well-rated ultimate counterparties. The trebling of the capital base over the past three years dilutes the large maximum annual tobacco hail loss exposure (US$1.1m), with the rating factoring in inherent potential capital fluctuations stemming from large single-year losses.

THI reflects gross asset exposures to THL cumulatively amounting to US$3.3m as of September 2014, based on calculations provided by management. At 63% of the insurer’s capital base, and 57% of investments, the exposure represents a material risk to financial strength giving rise to the placement of the rating on Evolving outlook. Note is taken of US$1m in intercompany liabilities, which partially offsets a portion of this risk, while independence in the corporate governance structure is also viewed to offer balance sheet protection. GCR will assess key developments relating to this exposure on a frequent basis.

THI’s rating benefits from the insurer’s established niche position as the leading domestic tobacco hail insurer (approximate market share of between 55% and 65%), 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 will serve to reduce its concentration to agriculture insurance. The elevation of execution risk in this regard is noted, as the benefits of the strategy will only fully accrue once the non-hail book reaches critical mass over the medium term.

Reduction of intercompany exposures and the concomitant preservation of balance sheet strength may allow for upward rating movement. The management of the diversification strategy to profitable growth, in tandem with robust solvency and liquidity, may also allow for a positive rating change. A material deterioration of solvency and liquidity metrics due to intragroup exposures will exert negative rating pressure. A weakening in the insurer’s credit profile due to insurance operations, in particular impacting on profitability, capitalisation and /or liquidity, may also negatively affect the rating.

For a detailed glossary of terms utilised in this announcement please click here

NATIONAL SCALE RATINGS HISTORY

Initial rating (August 2012)

Claims paying ability: BB+(ZW)

Outlook: Stable

Last rating (September 2013)

Claims paying ability: BB+(ZW)

Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
Chadwick@globalratings.net

Committee Chairperson
Benjamin Schmidt
Senior Analyst: Insurance
(011) 784-1771
Schmidt@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Insurance Companies (Updated July 2014)

THI rating reports, 2012 – 2013.

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.

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/s 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(s) included the 2013 audited annual financial statements (plus four years of comparative numbers), latest Internal and/or external report to management, budgeted financial statements for 2014, year to date management accounts to September 2014, investment and asset breakdowns to September 2014, the 2014 reinsurance cover notes, and other documentation related to the rating exercise.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GCR upgrades THI Insurance (Private) Limited’s rating to BBB-(ZW); Outlook Evolving

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