Johannesburg, 3 May 2017 — Global Credit Ratings has today assigned an initial national scale claims paying ability rating to Lion of Africa Insurance Company Limited of BBB(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Lion of Africa Insurance Company Limited (“LoA”) based on the following key criteria:
LoA implemented a strategic turnaround plan in FY15 to address the factors that were driving large losses. As a result, a decision was taken to exit the personal lines and corporate segments. At the same time, emphasis was placed on enhancing underwriting skills and pricing capabilities, while implementing a more stringent Risk Acceptance Guideline (“RAG”) for continuing lines of business. Together with the absence of large corporate exposures, these corrective measures are expected to contain the loss ratio at more industry-consistent levels going forward.
While implementing operational corrections, management also focused on strengthening the balance sheet by de-risking the investment portfolio and raising additional capital. This underpinned a strengthening in LoA’s nominal and risk adjusted capitalisation. The international solvency margin registered at 202% at FY16 (prior four year average: 34%), while Interim CAR cover stood at 4.1x (FY15: 1x). Capitalisation is expected to be sustained at strengthened levels over the outlook horizon, although could be partially impacted by a shortfall in net performance relative to expectations. Capital adequacy is further supported by the strong reinsurance panel, with net deductibles limited to conservative levels against capital.
The larger asset base and de-risking of the investment portfolio, together with a reduction in the risk base, have underpinned strong liquidity metrics over the past two years. Cash coverage of net technical liabilities equated to 2x at FY16 (FY15: 1x), while cash coverage of average monthly claims stood at 77 months (FY15: 14 months). GCR expects key liquidity measures to remain strong over the rating horizon, given the conservative investment approach adopted.
The gradual reversion to underwriting profitability is expected to enhance earnings generation, with profitability metrics forecast to strengthen to moderately strong levels from FY19 onwards (from the weak historical levels). Accordingly, the ability to successfully execute the expansion strategy, whilst containing loss ratios at industry-consistent levels, is expected to be a key rating driver over the medium to longer term.
Following corrective restructuring and cancellation of higher claiming business lines, the insurer’s market share reduced to 0.5% of total industry premiums, from around 1% at the start of the review period. Despite the strong medium term growth projections, GCR expects LoA’s competitive position to remain modest, given the currently low premium base. The earnings profile evidences a reasonable degree of diversification by line of business, with note taken of the fairly contained product risk associated with the property and motor orientated portfolios.
Positive rating movement over the medium term could follow the successful execution of the turnaround strategy, resulting in sustainably stronger underwriting profitability. This would need to be accompanied by strong credit protection metrics. In contrast, a weakening in capitalisation and/or liquidity, following deviations from forecast expectations, could result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial / last rating (May 2017)|
|Claims paying ability: BBB(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
RSA Short Term Insurance Bulletins, 2001 – 2016
RATING LIMITATIONS AND DISCLAIMERS
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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.
Lion of Africa Insurance Company 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 has been disclosed to Lion of Africa Insurance Company Limited with no contestation of the rating.
The information received from Lion of Africa Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The latest audited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Budgeted financial statements to 31 December 2020
- Quantitative statutory return to 31 December 2016
- The current reinsurance programme summary
- Other relevant documents
The rating above was solicited by, or on behalf of, the rated client, 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
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Rating Horizon||The rating outlook period|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|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.|
For a detailed glossary of terms please click here