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 criteria:
The rating is underpinned by Bidvest Insurance’s very strong level of risk adjusted capitalisation. Solvency Capital Requirement (“SCR”) cover has been maintained at very high levels over the past two years, and is projected to be sustained at around these levels over the medium term after applying various stress scenarios. Accordingly, GCR expects risk adjusted capital adequacy to remain very strong through the insurer’s near term expansionary phase.
Earnings capacity is assessed to be very strong, supported by a highly competitive net incurred loss ratio. The five year average underwriting margin amounted to 17% in FY16, while the corresponding return on net revenue registered at 35%. Despite the anticipated softening over the medium term (a function of base adjustments in FY16 and new business cost strain), GCR expects underwriting and net profitability to remain within a strong range over the outlook horizon, underpinned by sound cross cycle underwriting resilience.
The insurer displays a high investment risk appetite, with higher risk assets corresponding to 94% of shareholders’ funds at FYE16 and increasing to 125% at 1Q F17. Investment into additional equity instruments could contribute towards a further rise in asset risk over the short to medium term. Note is, however, taken of the high degree of underwriting profitability and strong risk adjusted capitalisation, which in GCR’s view positions the insurer to absorb a degree of potential market volatility. Furthermore, key liquidity metrics remain robust. Cash coverage of average monthly claims amounted to 32 months in FY16 (review period average: 36 months), while cash coverage of near term policyholder liabilities registered at 1.2x at FYE16 (review period average: 1.3x). Going forward, liquidity metrics are expected to moderate in line with the revised investment allocation strategy, although remaining sound and supportive of the rating.
Bidvest Insurance’s market share is very limited, which is a function of its historical focus on niche motor related products. In this regard, the business mix is heavily weighted towards the motor line of business, although the portfolio evidences a high degree of policyholder granularity and reasonably low product risk (given the large niche component). Longer term growth is expected to be underpinned by strategic expansion into commercial and personal lines, which could contribute towards enhanced diversification and scale efficiencies. While the new strategy introduces an element of execution risk (particularly in light of intensive competition), note is taken of the insurer’s conservative initial approach to these lines, which are heavily reinsured, while higher risk exposures are underwritten selectively. The reinsurance programme reflects a strong counterparty credit profile and limits net deductibles to conservative levels against capital.
GCR considers Bidvest Insurance to be strategically important to The Bidvest Group Limited, given the brand alignment and cross-synergies between the group’s insurance and sales operations (dealerships and travel agencies), as well as the insurer’s participation on a portion of the group’s asset insurance covers.
The successful execution of expansion initiatives and potentially strengthened business profile (by way of both an increase in market share and enhanced earnings diversification) could translate into positive rating movement over the longer term. In contrast, a sustained deterioration in capital adequacy or liquidity levels could place downward pressure on the rating.
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