Announcements Insurance Rating Alerts

GCR affirms Lidwala Insurance Company Limited’s national scale financial strength rating of A(SZ); Outlook Stable

Rating action

Johannesburg, 15 September 2020 – GCR Ratings (“GCR”) has affirmed Lidwala Insurance Company Limited’s (“Lidwala Insurance”) national scale financial strength rating of A(SW), with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Lidwala Insurance Company Limited Financial strength National A(SZ) Stable Outlook

Rating rationale

Lidwala Insurance’s national scale financial strength rating reflects the insurer’s strong financial profile, underpinned by strong capitalisation coupled with sound earnings and liquidity, more than offsetting the impact of a comparatively limited business profile.

Risk adjusted capitalisation has been maintained within a strong range, with the capital base catering for the quantum of insurance and market risk exposures. As such, the GCR capital adequacy ratio registered at 2.3x (FY19: 1.9x) while the statutory solvency equated to 320% (FY19: 288%). Cognisance is taken of the insurer’s comparatively lower capital base (in absolute terms) of USD2.9m and high exposure to premium receivables, which accounted for 77% of capital at FY20 (FY19: 67%), adversely affecting capital scale and quality. Going forward, risk adjusted capitalisation is expected to remain strong, albeit with potential moderation in the SCR coverage given exposure to COVID-19 pandemic risks.

Liquidity has been maintained within a moderately strong range, supported by internal cash generation and conservative asset allocation. Note is taken of the moderation registered in FY20 due to a large claim that was paid, part of which is expected to be recovered from reinsurers. In this regard, coverage of net technical liabilities by cash and stressed financial assets equated to a lower 1.4x (FY19: 1.7x), while operational cash coverage registered at 13 months (FY19: 16 months; FY18: 18 months). The insurer’s liquidity is nevertheless sensitive to increased exposure to both premium and reinsurance receivables given the observed build-up in these balances over the recent past. Accordingly, the underwriter’s ability to enhance premium collection and positively influence liquidity metrics represents a key rating consideration over the rating outlook.

Earnings are viewed to be intermediate, supported by a comparatively lower net incurred loss ratio. In this respect, the five-year average underwriting margin registered at 7% (FY20: 7%; FY19: 8%), while the net incurred loss ratio equated to 42% (FY19: 41%; review period average: 46%). Going forward, earnings are likely to demonstrate resilience in the face of the COVID-19 pandemic, given limited exposure to risks directly associated with the pandemic.

Lidwala Insurance’s market position is viewed to be strong with the insurer maintaining its position as the second largest player in the local short-term industry, commanding a market and relative market share of 18% and 0.9x in FY20 (FY19: 18.5% and 0.9x), respectively. The business profile is nevertheless constrained by local market concentration and a limited product mix with two lines of business contributing materially to total GWP. The business profile is likely to remain unchanged over the medium term.

Outlook statement

The Stable Outlook is premised on expectations of earnings resilience over the rating horizon, despite the presence of COVID-19 pandemic risks. Furthermore, the Outlook captures prospects of continued strength in capitalisation, while noting potential moderation in factor assessment should receivables collection remain a challenge. The business profile is unlikely to change materially over the medium term.

Rating triggers

The rating may be upgraded on material improvement in earnings and/or risk adjusted capitalisation, while maintaining a strong market position. Conversely, we could lower the rating if challenges in premium collection persists, negatively impacting liquidity and capitalisation to levels below expectations.

Analytical contacts

Primary analyst Linda Matavire Analyst: Insurance Ratings
Johannesburg, ZA LindaM@GCRratings.com +27 11 784 1771
Committee chair Tichaona Nyakudya Senior Analyst: Insurance Ratings
Johannesburg, ZA TichaonaN@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, May 2020
GCR Insurance Sector Risk Scores, July 2020

Rating history

Lidwala Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Financial strength Initial/last National A(SZ) Stable Outlook February 2020

Risk score summary

Rating components and factors Risk score
Operating environment 5.25
Country risk score 2.50
Sector risk score 2.75
Business profile (0.50)
Competitive position 0.50
Premium diversification (1.00)
Management and governance 0.00
Financial profile 1,75
Earnings 0.50
Capitalisation 1.25
Liquidity 0.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 6.50

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
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.
Statutory Required by or having to do with law or statute.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.
Upgrade The rating has been raised on its specific scale.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the rated entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 30 June 2020;
  • Four years of comparative audited financial statements to 30 June
  • Full year budgeted financial statements for 2021;
  • Unaudited interim results to 31 July 2020;
  • Reinsurance cover notes for 2021; and
  • Other relevant documents.
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