GCR affirms The Hollard Insurance Company Limited’s rating of AA(ZA); Outlook Stable
Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to The Hollard Insurance Company Limited of AA(ZA), with the outlook accorded as Stable.
Summary rating rationale
Global Credit Ratings (“GCR”) has accorded the above credit rating to The Hollard Insurance Company Limited (“Hollard”) based on the following key criteria:
The rating is underpinned by Hollard’s very strong competitive position. The insurer is the second largest participant in the market, with a 9% share of GWP, and a premium base of 8.5x the industry average. Going forward, GCR considers Hollard to be well placed to sustain its competitive strength, supported by its extensive intermediary network, strong brand and continued momentum in the corporate segment. GCR views Hollard’s revenue stream to be very well diversified across policyholders, buying segments and procurement channels. The insurer occupies a top tier position in six of the key statutory lines of business, each of which reflects material premium scale.
Hollard’s capitalisation is assessed to be moderately strong. Solvency Capital Requirement (“SCR”) coverage moderated at FYE16, which was primarily attributed to balance sheet restructuring. In this regard, Hollard transferred certain strategic investments to the holding company via a dividend in specie in FY16. Accordingly, total capital decreased by 15% to R3.7bn at FYE16 (FYE15: R4.4bn). This is nevertheless viewed in the context of reduced asset risk, as well as the low levels of product risk associated with the motor and property orientated portfolio. The insurer plans to manage SCR cover within a band of 1.25x to 1.5x going forward. Accordingly, risk based capitalisation is expected to remain at moderate to strong levels, although may be sensitive to dividend payments.
The exposure to group and other insurance related investments historically introduced a heightened degree of systemic risk. In this regard, the sale of a large portion of strategic investments has enhanced asset quality, with higher risk assets projected to be maintained at fairly conservative levels post balance sheet restructuring. Key liquidity measures have been sustained at moderate to strong levels, and are expected to be maintained within a sound range, given the insurer’s active asset liability matching approach.
Earnings capacity is viewed to be moderately strong. The diversified business mix and relatively large niche component have assisted in maintaining sound cross cycle technical profitability. However, this is offset by the higher operational costs associated with the partnership focused business model, with Hollard’s underwriting margin trailing that of its competitors (although exhibiting a lower degree of volatility). In this respect, earnings capacity is supported by the large investment portfolio, which has contributed towards healthy returns on revenue (review period average: 15%). Earnings protection also stems from the reinsurance programme, which reflects a strong counterparty credit profile and limits net deductibles to conservative levels against capital.
Positive rating action could follow a sustained strengthening in underwriting profitability metrics, together with enhanced levels of capitalisation. In contrast, the rating is sensitive to a reduction in risk adjusted capitalisation or liquidity. Furthermore, a protracted weakening in net profitability could give rise to downward rating movement.
