A.M. Best has affirmed the “A-” (Excellent) Financial Strength Rating (FSR) and “a-” Long-Term Issuer Credit Rating of The Hollard Insurance Company Ltd (HIC).
In a statement, the global ratings agency said the ratings affirmation reflects HIC’s “strong risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and good operating performance.”
HIC’s strong risk-adjusted capitalization is said to be due primarily to its moderate underwriting leverage and the financial support it gets from its parent entities, including capital infusions, hybrid capital, and contingent capital facilities.
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The company is also expected to remain consistently profitable, based on a product portfolio that mostly comprises of pet health insurance, as well as domestic home and motor insurance in Australia. Over the past five years, HIC has earned roughly 11% average return on capital.
HIC’s low capital quality, on the other hand, partially offsets these strengths, and was due to the company’s relatively strong dependency on reinsurance.
HIC writes a huge amount of business as compared to its capital size, resulting in a high gross underwriting leverage, A.M. Best said. Meanwhile, it ceded 24% of its gross premiums and reserves to reinsurance, also elevating the company’s reinsurance leverage. As of June 30, 2016, its ceded reinsurance leverage ratio has reached 200%, suggesting a very high dependence on reinsurance.
The ratings agency said negative rating action could occur from inadequate product pricing that results in material deviations from the expected improvement in operating performance or risk-adjusted capitalization; as well as diminished capital support from the company’s parent entities.
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