Johannesburg, 30 November 2017 — 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:
Lombard’s market leadership position in the performance guarantee sub-segment (construction) impacts positively on the rating. GCR considers the company to be well positioned to defend its market share within this and other niche sub segments, given its extensive experience and expertise, as well as its established brand and client relationships.
The insurer’s well diversified earnings base is supported by established revenue streams from five specialist classes (transport, guarantee, liability, property and engineering), each contributing materially to gross premiums in FY17. Net 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), as well as sub segment diversification within the guarantee lines.
Liquidity has trended within a strong range across the review period, underpinned by the insurer’s sizeable cash holdings (relative to technical provisions), with the cash coverage of net technical provisions tracking above 0.8x (FY17: 0.9x) throughout the corresponding period.
GCR notes the historically elevated levels of market risk stemming from large related party receivables (64% of FY17 capital), which has served to constrain balance sheet efficiency. However, the completion of a transaction to settle a portion of this receivable in FY18 (R414m received at 3M FY18, 48% of FY17 capital) is expected to correct this imbalance to a large degree, and likely alleviate pressure on risk adjusted capitalisation and provide some uplift to liquidity metrics (with receipts being placed in cash instruments). Accordingly, Lombard is expected to preserve strong levels of liquidity, with the investment portfolio expected to be slightly skewed towards cash investments over the medium term.
Lombard’s capitalisation is viewed to be sound, with the insurer sustaining an international solvency margin (including Tier-II capital) above 140% over the past three years. In FY17, the aforementioned elevation in market risk depressed internal risk adjusted capitalisation below targeted levels. However, GCR takes cognisance of the corrective mechanisms implemented, with medium term risk adjusted capitalisation expected to revert back to historical levels. Furthermore, reinsurance counterparties reflect a strong aggregate credit profile, while Excess of Loss net deductibles are limited to conservative levels relative to capital.
Earnings capacity continues to trend within an intermediate range, with the five year average underwriting margin equating to a subdued 2% in FY17. Although the insurer’s historical claims experience has been fairly well contained, a relatively elevated cost base has served to constrain earnings to intermediate levels. The underwriting margin is budgeted to improve to 7% in FY18 (FY17: 2%) as a result of cost efficiencies envisaged. After factoring in the inherent cyclicality of the industries in which the insurer operates, through the cycle earnings are expected to be maintained at intermediate levels.
Relevant debt ratios were fairly stable in FY17, with gross gearing registering at a moderate 31% (FY16: 32%), while gross interest coverage equated to a sound 4x (FY16: 4x).
Upward rating movement may follow a material and sustained improvement in earnings, coupled with a strengthening in risk adjusted capitalisation and liquidity. 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.
|CPA NATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2004)|
|Claims paying ability: A(ZA)|
|Last rating (November 2016)|
|Claims paying ability: A+(ZA)|
|SUBORDINATED DEBT NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2014)|
|Unsecured Subordinated Notes (LOM01): BBB+(ZA)|
|Last rating (November 2016)|
|Unsecured Subordinated Notes (LOM01): BBB+(ZA)|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Criteria for Rating Insurance Companies’ Debt and Hybrid Equity Instruments, updated July 2017
Lombard rating reports, 2004-2016
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 were 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 are 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:
- The audited financial statements to June 2017
- Four years of comparative audited financial statements
- Full year budgeted financial statements to June 2018
- Quantitative statutory returns to June 2017
- 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.
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.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|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.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|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.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|Short Term||Current; ordinarily less than one year.|
|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.