Johannesburg, 19 Nov 2014 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Lombard Insurance Company Limited of A+(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Lombard Insurance Company Limited (“Lombard”) based on the following key criteria:
The rating is supported by Lombard’s market leadership position in the performance guarantee sub-segment. GCR considers the company to be well positioned to defend its niche, given the insurer’s extensive experience and expertise, as well as its established brand and client relationships.
The insurer’s primary competitive advantage stems from its experienced specialist underwriting team, risk management capabilities, and focus on risk mitigation both pre-emptively, and through salvage and recoveries. In particular, we view Lombard to have developed very strong risk assessment functionality in its core bonding portfolio (aided by an entrenched close-to-market standing), which also serves as a significant barrier to entry for potential competitors. Furthermore, the company’s deliberate enhancement of cross-divisional earnings diversification, with limited risk overlap across operating units is considered a rating positive. Lombard has demonstrated cross-cycle underwriting profitability that GCR views to be strong, albeit volatile, given the nature of the underlying insurance exposures and relatively high cost base.
Lombard’s capital adequacy is a key rating strength. Solvency metrics are expected to remain robust over the rating horizon, on the back of the near term Tier II debt issue and balance sheet restructuring over the medium term. Key liquidity measures remain sound and are complemented by interest bearing securities. Furthermore, the proceeds of the Tier II debt issue are expected to be invested in cash and near cash, which will further enhance the insurer’s liquidity profile. Reinsurance counterparty credit risk is low to moderate, although note is taken of the insurer’s relatively high risk retention appetite.
Asset quality is impacted by the large related party loans, which attract a high capital charge under the proposed Solvency Assessment and Management framework. Note is, however, taken of the group’s plans to reduce these exposures at the insurance licence level. This is complemented by an increasingly conservative investment approach, with a slant towards less risky financial assets in recent years.
Upward movement of the rating or outlook could develop with profitable premium expansion and improved economies of scale. This is premised on sustaining risk adjusted capitalisation at currently strong levels. Downward movement may arise following a sustained weakening in underwriting profitability, or large retained losses. A deterioration in asset quality that impacts on risk adjusted capital adequacy and/or key liquidity measures could also place downward pressure on the rating.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Mar/2004)
Claims paying ability: A(ZA)
Outlook: Stable
Last rating (Nov/2013)
Claims paying ability: A+(ZA)
Outlook: Stable
ANALYTICAL CONTACTS
Primary Analyst
Susan Hawthorne
Analyst
(011) 784-1771
Susanh@globalratings.net
Committee Chairperson
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
Chadwick@globalratings.net
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Short Term Insurance and Reinsurance Companies, Updated July 2014
Criteria for Rating Insurers’ Debt and Hybrid Equity Instruments, Updated July 2014
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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.
Lombard 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/s has been disclosed to Lombard Insurance Company Limited with no contestation of the rating.
The information received from Lombard Insurance Company Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, full year detailed budgeted financial statements for F15, unaudited year to date management accounts to September 2014, the 2014/2015 reinsurance cover notes, exposure breakdowns for underlying portfolios as at FYE14, statutory returns for F14 and 1Q F15, and other non-public statistical information.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|
Bond |
A certificate issued by a government or corporation as evidence of a debt. The issuer of the bond promises to pay the bondholder a specified amount of interest for a specified period and to repay the loan on the expiration (maturity) date. |
|
Insurance |
A formal social device for reducing risk by transferring the risks of several individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a specified extent, the losses suffered by the insured. |
|
Insurance Company |
Any corporation primarily engaged in the business of furnishing insurance protection to the public. |
|
Insured |
A person or organisation covered by an insurance policy, including the “named insured” and any other parties for whom protection is provided under the policy terms. |
|
Insurer |
The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public. |
|
Liquidity |
The ability of an insurer to convert its assets into cash to pay claims if necessary. |
|
Portfolio |
All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. Also, the total securities owned by an insurer. |
|
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. |
|
Retention |
The net amount of risk the ceding company keeps for its own account |
|
Risk |
(1) Uncertainty as to the outcome of an event when two or more possibilities exist. See also Pure Risk and Speculative Risk. (2) A person or thing insured. Contrast with Hazard and Peril. |
|
Risk Management |
An effort by a company or individuals employed or contracted by the company to minimise expenditure and maximise profitability. |
|
Salvage |
Property taken over by an insurer to reduce its loss. |
|
Securities |
Evidences of a debt or of ownership, as stocks, bonds, and checks. |
|
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. |
|
Surplus |
The excess of assets over liabilities. Statutory surplus is an insurer’s or reinsurer’s capital as determined under statutory accounting rules. Surplus determines an insurer’s or reinsurer’s capacity to write business responsibility for only that portion of any risk, which exceeds the company’s established retentions. |
|
Term |
The period of time for which a policy or bond is issued. |
|
Term Insurance |
Life or health insurance protection during a limited number of years but expiring without value if the insured survives the stated period. |
|
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. |
|
Valuation |
Estimation of the value of an item, usually by appraisal. |
GCR affirms Lombard Insurance Company Limited’s rating of A+(ZA); Outlook Stable.
