Johannesburg, 1 December 2016 — 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 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 its extensive experience and expertise, as well as its established brand and client relationships. Furthermore, earnings diversification is viewed to be strong. Lombard displays a well-diversified revenue stream, with four specialist classes (transport, guarantee, liability and engineering) each contributing materially to gross premiums in FY16. Risk premiums are concentrated towards the guarantee class, although capacity to manage earnings risk is evidenced by the high levels of average technical profitability through the credit cycle (albeit subject to potential year on year volatility).
Investment market risk has increased slightly, with higher risk assets corresponding to 55% of FYE16 capital, compared to the conservative levels displayed previously (FYE15: 43%; FYE14: 32%). This is nevertheless viewed in the context of the anticipated settlement of related party receivables (49% of capital at FYE16), which is expected to enhance Lombard’s overall balance sheet profile.
Despite a softening in FY16, key liquidity metrics remained strong, with cash cover over net technical liabilities registering at 0.8x (review period average: 0.9x) and coverage of average monthly claims amounting to 20 months (review period average: 18 months). Going forward, GCR expects liquidity metrics to remain sound, given the insurer’s asset-liability matching approach.
The insurer reflects strong levels of solvency on a nominal basis, with the international solvency margin trending above 140% over the past two years (BY17: 130%). The large capital base caters for the high degree of underwriting volatility associated with the guarantee lines. Risk adjusted capitalisation is assessed to be sufficient and is expected to remain within a similar range over the rating horizon. Reinsurance counterparties reflect a strong aggregate credit profile, while Excess of Loss (“XoL”) net deductibles are limited to conservative levels relative to capital.
Earnings capacity is viewed to be intermediate, with the five year average underwriting margin amounting to 3% in FY15 and the corresponding return on revenue registering at 9%. Going forward, continued growth in the Partnership portfolio could translate into enhanced scale efficiencies and earnings strength over the medium term.
Gross interest coverage ratios were reported at sound levels in FY16, while financial leverage is deemed to be moderate, with gross gearing registering at 33% at FYE16.
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. In contrast, downward rating 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 RATINGS HISTORY||NATIONAL SCALE SUBORDINATED DEBT RATINGS HISTORY|
|Initial rating (March 2004)||Initial rating (November 2014)|
|Claims paying ability: A(ZA)||Unsecured Subordinated Notes (LOM01): BBB+(ZA)|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2015)||Last rating (November 2015)|
|Claims paying ability: A+(ZA)||Unsecured Subordinated Notes (LOM01): BBB+(ZA)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|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
Lombard rating reports, 2004 – 2015
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 ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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 ratings.
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 2016
- Four prior years of comparative audited financial results to 30 June
- Budgeted financial statements to 30 June 2017
- Statutory return to 30 June 2016
- The current year reinsurance cover notes
- Other relevant documents
The ratings above was 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>
|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.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|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.|
|Financial Leverage||The degree to which a company uses debt and equity in its capital structure.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Interest||Money paid for the use of money.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Rating Horizon||The rating outlook period|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|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.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR affirms Lombard Insurance Company Limited’s rating of A+(ZA); Outlook Stable.