Johannesburg, 1 December 2015 — 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. Global Credit Ratings has also affirmed the national scale long term rating accorded to Lombard’s R200m unsecured subordinated notes (Stock Code LOM01) of BBB+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Lombard Insurance Company Limited (“Lombard”) based on the following key criteria:
The ratings are 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.
Lombard’s solvency levels have been maintained at strong levels on a nominal basis, with the international solvency margin trending above 100% over the past two years (BY16: 114%). The large capital base caters for the high degree of underwriting volatility associated with the guarantee lines, which is partly offset by the low market risk appetite. Risk adjusted capitalisation is expected to be sustained at rating consistent levels, following a reduction in credit risk associated with related party loans (ahead of SAM implementation), as well as strong projected earnings accumulation over the medium term. Gross and net interest coverage ratios were reported at sound levels in FY15, while financial leverage is deemed to be moderate, with gross gearing registering at 33% at FYE16. The reinsurance programme is placed with well rated counterparties and limits net deductibles to conservative levels against capital.
Investment risk is well contained, with higher risk assets equating to a conservative 33% of FYE15 capital (FYE14: 32%). Furthermore, the anticipated recovery of intra-group loans should significantly enhance Lombard’s balance sheet profile, and allow for a more efficient investment mix from a capital management and earnings perspective. Key liquidity measures remain sound and are expected to be maintained within a strong range over the rating horizon.
The insurer reflects a high level of revenue diversification, which is expected to be further enhanced by medium term growth into the motor fleet and property lines of business. The risk premium base is concentrated towards the guarantee lines of business, although volatility has been reasonably well managed through strong technical capacity relating to underwriting risk management that is well entrenched in the company’s operations. Barring the non-recurring loss incurred in FY14, Lombard has demonstrated consistent underwriting profitability through the credit cycle, which GCR views to be indicative of future earnings stability. The anticipated attainment of scale efficiencies over the short to medium term is likely to provide further support to underwriting margins.
Upward movement of the rating or outlook could develop with material and profitable premium expansion. This is premised on sustaining key credit protection metrics in line with medium term expectations. Downward movement could arise following a sustained weakening in underwriting profitability, or large retained losses, to the extent that these impact on the insurer’s medium term credit strength.
| NATIONAL SCALE CPA RATINGS HISTORY | NATIONAL SCALE SUBORDINATED DEBT RATINGS HISTORY | |
| Initial rating (March 2004) | Initial / last rating (November 2014) | |
| Claims paying ability: A(ZA) | Unsecured Subordinated Notes (LOM01): BBB+(ZA) | |
| Outlook: Stable | Outlook: Stable | |
| Last rating (November 2014) | ||
| Claims paying ability: A+(ZA) | ||
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | Committee Chairperson | |
| Susan Hawthorne | Marc Chadwick | |
| Senior Credit Analyst | Sector Head: Insurance Ratings | |
| (011) 784-1771 | (011) 784-1771 | |
| susanh@globalratings.net | chadwick@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Criteria for Rating Insurance Companies’ Debt and Hybrid Equity Instruments, updated July 2015
Lombard rating reports, 2004-2014
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
| Assets | A resource with economic value that a company owns or controls with the expectation that it will provide future benefit. |
| 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. |
| Budget | Financial plan that serves as an estimate of future cost, revenues or both. |
| 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 Base | The issued capital of a company, plus reserves and retained profits. |
| Claim | A request for payment of a loss, which may come under the terms of an insurance contract. |
| Credit Rating | An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. |
| Credit Rating Agency | An entity that provides credit rating services. |
| Creditworthiness | An assessment of a debtor’s ability to meet debt obligations. |
| Debt | An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period. |
| 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. |
| Equity | Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit. |
| International Solvency Margin | Measures the ability to cover current year’s written premiums using shareholder’s funds. |
| Investment Risk | The risk of a decline in the net realisable value of investment assets arising from adverse movements in market prices or factors specific to the investment itself (e.g. reputation and the quality of management). |
| 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. |
| Liquidity Risk | The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market. |
| Long term | Not current; ordinarily more than one year. |
| Loss | The happening of the event for which insurance pays. |
| Market Risk | Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors. |
| Portfolio | All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. |
| Premium | The price of insurance protection for a specified risk for a specified period of time. |
| Rating Horizon | The rating outlook period |
| Rating Outlook | A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered). |
| 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. |
| Reserve | An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Risk Management | Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy. |
| Securities | Various instruments used in the capital market to raise funds. |
| Shareholder | An individual, entity or financial institution that holds shares or stock in an organisation or company. |
| 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. |
| Subordinated Debt | Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt. |
| 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. |
| Underwriting Margin | Measures efficiency of underwriting and expense management processes. |
For a detailed glossary of terms please click here
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 ratings have 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 ratings included:
- Audited financial results to 30 June 2015
- Four prior years of comparative audited financial results to 30 June
- Unaudited management accounts to 30 September 2015
- Budgeted financial statements to 30 June 2016
- Statutory returns to 30 June 2015
- The current year reinsurance treaties
- Other relevant documents
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.
GCR affirms Lombard Insurance Company Limited’s rating of A+(ZA); Outlook Stable.