Johannesburg, 13 November 2018 — 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 debt 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 factors:
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 classes (guarantee, property, liability, engineering and motor), each contributing materially to gross premiums in FY18. 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 is assessed to be strong, supported by a sizeable cash portfolio and consistently positive operating cash flows. The settlement of large outstanding related party receivables in FY18 bolstered the year end cash balance to R762m (FY17: R495m), underpinning higher liquidity metrics. In this regard, cash coverage of net technical provisions and average monthly claims equated to 1.2x and 39 months respectively at FY18 (FY17: 0.9x and 26 months respectively). The investment approach is likely to remain consistent with prior periods with a skew towards cash and equivalents. This is likely to support strong liquidity over the rating horizon.
Lombard evidenced sound capitalisation on a risk adjusted basis, with the regulatory Solvency Capital Requirement coverage (“SCR”) tracking slightly above the internal benchmark. SCR cover rebounded in FY18 as the conclusion of the transaction to settle related party receivables for cash resulted in a notable reduction in the market risk charge. Management’s forward looking projections incorporate increased use of debt within the capital structure as a cost effective source of funding. Lombard plans to issue additional unsecured debt of R100m, subject to Prudential Authority approval. Lombard intends to maintain SCR coverage at the upper end of the internal target band over the rating horizon which is expected to support sustained capital strength. 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 is viewed to be intermediate, noting the insurer’s earnings exposure to cyclical market segments that have resulted in variable underwriting performance over the review period. However, note is taken of the recent upward trend in earnings, achieved on the back of contained claims and improved cost efficiencies, ultimately leading to a robust underwriting margin of 10% in FY18 (FY17: 3%; five year average: 3.5%). GCR notes the stabilisation in the claims ratio over the past two years, which management expects could be sustained going forward should earned premiums materialise as projected, notwithstanding any further deterioration in the construction segment. This, in tandem with ongoing cost management, may allow for sustained underwriting margin elevation which could support strengthened earnings capacity over the medium term, although potentially higher debt service costs and performance linked profit share commissions in the growing partnership division may offset some of this upside.
Relevant debt ratios were fairly stable in FY18, with gross gearing registering at a moderate 29% (FY17: 31%), while gross interest coverage improved to a sound 6x (FY17: 4x). Should management raise further debt, debt ratios may weaken in the absence of continued strengthened earnings capacity. As such, the ability of the insurer to sustain improved earnings is likely to be a key rating consideration over the medium term.
Upward rating movement may follow a sustained improvement in earnings, coupled with strengthening in risk adjusted capitalisation. 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. The subordinated debt rating is sensitive to interest coverage tracking substantially below expectations, or gearing metrics being consistently elevated.
|CPA NATIONAL SCALE RATINGS HISTORY|
|Initial rating (March 2004)|
|Claims paying ability: A(ZA)|
|Last rating (November 2017)|
|Claims paying ability: A+(ZA)|
|SUBORDINATED DEBT NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2014)|
|Long term debt: BBB+(ZA)|
|Last rating (November 2017)|
|Long term debt: BBB+(ZA)|
|Senior Credit Analyst|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Insurance Companies’ Debt and Hybrid Equity Instruments, updated May 2018
Lombard rating reports, 2004-2017
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.
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 2018
- Four years of comparative audited financial statements
- Full year budgeted financial statements to June 2019
- Quantitative statutory returns to June 2018
- Other relevant documents
The ratings above were solicited by, or on behalf of, the rated entity, 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.|
|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