Johannesburg, 20 Dec 2013 — 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 accorded the above credit rating(s) on Lombard Insurance Company Limited based on the following key criteria:
Lombard Insurance Company Limited (“Lombard”) traces its roots back to 1990, when it was established as a specialist provider of guarantee insurance products. In 2001, the insurer expanded its product offering to include trade credit business as well. The insurer has expanded into the UMA segment over the review period, with the aim of growing into other niche insurance markets and diversifying its risk base. The company is partially owned by The Hollard Insurance Company Limited, with a 38.1% direct shareholding.
Lombard is the market leader in the performance guarantee arena. The insurer’s established market position and enhanced business profile has been supported by its strong franchise value, specialised underwriting and strong management teams, which is a supporting factor to the rating. Capital adequacy is deemed to be adequate relative to the risk profile of the entity. The insurer is in a sustained capital build up phase approaching the SAM implementation date and plans to introduce Tier-II capital post FYE13. Going forward, the statutory CAR coverage ratio is expected to remain above 1.5x under the Interim Measures, which is a sustaining factor to the rating. Amid the reduction in the risk profile of the insurer’s investment portfolio, coupled with the change in the insurer’s risk base, the sound liquidity metrics have strengthened. This has further underpinned the insurer’s rating.
Risk premium diversification has been supported by the active management of the Partnerships division over the review period. The flexibility of the business model to diversify premium and profitability streams, whilst maintaining the core book of business (namely performance guarantee book), is favourably viewed. Note is, however, taken of the shift in business mix and concomitant reduced premium volumes going forward. Supported by its scientific underwriting approach and experience in managing the associated business risks, the insurer has consistently registered underwriting surpluses through the cycle, which have been underpinned by certain profitable specialist segments. The expansion into UMA sourced business lines has, however, induced underwriting margin compression, converging to that of the overall industry. Factors considered constraints in the rating were the UMA-based business model, which is viewed to be exposed to a higher level of inherent risk due to the outsourcing of certain key functions. This notwithstanding, cognisance is taken of the operational platform enhancements implemented, strengthening the risk management framework, as well as the small number of UMAs in the portfolio.
An upward movement of the rating or outlook could develop with profitable premium creation and continued earnings diversification. This must be accompanied by a strengthening in risk based solvency levels. In terms of a downward movement, this may arise if multiple, significant underwriting losses were to materialise thereby leading to rapid capital erosion, and in the absence of additional capital support. Increased outlays to related parties may also increase capital exposure. A material loss of reinsurance support, particularly to high risk exposures (given the large sums insured), would also place downward pressure on the rating, as well as a sustained reduction to scale efficiencies impacting on profitability.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Mar/2004)|
|Claims paying ability: A(ZA)|
|Last rating (Nov/2012)|
|Claims paying ability: A+(ZA)|
|+27 11 784 1771|
|Regional Sector Head: Insurance|
|+27 11 784 1771|
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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 FYE13 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 F14, unaudited year to date management accounts to September 2013, the 2013/2014 reinsurance cover notes, exposure breakdown for underlying debtor portfolios as at FYE13, debtors provisioning policy document, reserving methodologies, statutory return for FYE13 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.