Credit Rating Announcement
GCR affirms Bidvest Insurance Limited’s rating of A(ZA); Outlook Stable
Johannesburg, 31 January 2019 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Bidvest Insurance Limited of A(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Bidvest Insurance Limited (“Bidvest Insurance”) based on the following key factors:
The rating is supported by the insurer’s strong earnings capacity, underpinned by a highly competitive net incurred loss ratio. In this respect, the five year average underwriting margin equated to 16% in FY18, while the corresponding return on NEP averaged 28%. GCR expects earnings metrics to remain within a strong range over the outlook horizon, although some moderation is expected over the medium term as the insurer expands into more competitive, lower margin segments. Furthermore, net earnings may be impacted by volatility in investment markets, given the insurer’s high listed equity exposure.
Risk adjusted capitalisation has moderated from the very strong levels posted historically, following large dividend extractions in FY16 and FY17. Going forward, SCR coverage is expected to be managed within a sound range, supported by strong internal earnings generation. The reinsurance programme reflects a sound counterparty credit profile and limits net deductibles to conservative levels against capital.
Bidvest Insurance reflects a moderately strong level of liquidity, with strong operational liquidity metrics partly offset by intermediate technical provision coverage. In this regard, on an adjusted basis (including interest bearing investments), cash coverage of average monthly claims and net technical provisions registered at 22 months and 0.6x at FY18 (FY17: 19 months and 0.6x). GCR’s assessment of the insurer’s overall liquidity profile nevertheless considers the support available from the large portfolio of tradeable investments.
The insurer displays a high investment risk appetite, with higher risk assets corresponding to 118% of shareholders’ funds at FY18 (FY17: 121%). Note is, however, taken of the strong underwriting profitability and sound risk adjusted capitalisation, which in GCR’s view positions the insurer to absorb a degree of potential market volatility.
Bidvest Insurance’s market share is very limited, which is a function of its historical focus on niche motor related products. Longer term growth is expected to be underpinned by strategic expansion into commercial and personal lines and development of new product offerings, although introducing an element of strategic implementation risk. The business mix is heavily weighted towards the motor line of business. Note is, however, taken of the high degree of policyholder granularity within these books, and the reasonably low product risk (given the large niche component).
GCR considers Bidvest Insurance to be strategically important to The Bidvest Group Limited (“Bidvest”), given the brand alignment and cross-synergies between Bidvest’s insurance and sales operations (dealerships and other intermediaries), as well as the insurer’s participation on a portion of Bidvest’s asset insurance covers.
Positive rating action may follow successful execution of the expansion strategy, while maintaining strong earnings capacity. In contrast, downward rating action may follow a reduction in capitalisation, liquidity and/or profitability.
NATIONAL SCALE RATINGS HISTORY
Initial rating (November 2015)
Claims paying ability: A(ZA)
Last rating (December 2017)
Claims paying ability: A(ZA)
Senior Credit Analyst
Sector Head: Insurance Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018 South Africa Short Term Insurance Bulletins, 2001 – 2017 Bidvest Insurance rating reports, 2015 – 2018
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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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Bidvest Insurance 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 was disclosed to Bidvest Insurance Limited.
The information received from Bidvest Insurance Limited and other reliable third parties to accord the credit rating included:
- The latest audited financial statements to 30 June 2018
- Four years of comparative audited financial statements to 30 June
- Budgeted financial results to 30 September 2019
- Quantitative statutory returns to 30 June 2018
- The current year reinsurance treaties • Other relevant documents
The rating above were 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
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||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.|
|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.|
|Incurred Loss||The total amount of paid claims and loss reserves associated with a particular time period, usually a policy year.|
|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.|
|Investment Risk||The risk of a decline in the net realisable value of investment assets arising from adverse movements in market prices or factors specific to the investment itself (e.g. reputation and the quality of management).|
|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 Incurred Loss||The total amount of paid claims and loss reserves associated with a particular time period, less the reinsurance portion.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
For a more detailed glossary of terms please click here