Announcements Insurance Rating Alerts

GCR affirms Lombard’s financial strength rating at A+(ZA), affirms/assigns issue ratings at BBB+(ZA), issuer rating at A(ZA).

Rating Action

Johannesburg, 10 October 2019 – GCR has affirmed Lombard Insurance Company Limited’s (“Lombard”) national scale financial strength (formerly claims paying ability) rating of A+(ZA), Stable Outlook. GCR has also assigned Lombard a national scale long term issuer rating of A(ZA), with a Stable Outlook. GCR has also assigned a national scale long term issue rating to Lombard’s R100m outstanding subordinated Notes (Stock Code LOM02) of BBB+(ZA). Lastly, GCR has affirmed the national scale long term issue rating accorded to Lombard’s R100m outstanding subordinated Notes (Stock Code LOM01) of BBB+(ZA).

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Lombard Insurance Company Limited Financial strength National A+(ZA) Stable Outlook
Long term issuer National A(ZA) Stable Outlook
LOM01 Long term issue National BBB+(ZA) Stable Outlook
LOM02 BBB+(ZA) Stable Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Lombard were placed ‘Under Criteria Observation’. GCR has finalised the review under the Criteria for Rating Insurance Companies, May 2019. As a result, the ratings have been reviewed in line with the new methodology, and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The ratings on Lombard reflect its status as the core operating entity in the Lomhold Group (“the group”), along with a moderately strong financial profile supported by sound liquidity, well managed capitalisation and earnings, countered by moderate market positioning and premium diversification. The insurer’s credit profile is expected to exhibit similar characteristics over the short term, with sustained liquidity strength being partially offset by potential variability in capitalisation and underwriting margins. The national scale long-term issuer credit rating is one notch lower than the financial strength rating, because GCR views policyholder obligations to be senior to that of senior unsecured creditors. The ratings on the notes reflect the subordinated status and the mandatory deferability (if there is a solvency event or if the regulator requires) of the instrument.

Liquidity is viewed to be sound, underpinned by healthy technical coverage by stressed liquid assets and good operational cash flow. This is supported by a conservative investment strategy, highly skewed towards cash and cash equivalents (FY19: R613m). Liquidity strength is expected to be sustained going forward, although earnings pressure may dilute cash flow generation slightly, which could impinge on key metrics. This could be offset by the planned introduction of new capital at the group.

The insurer has demonstrated sound through the cycle earnings management, with earnings resilience amidst challenging economic conditions, noting the consistent positive underwriting performance over the past five years (albeit noting potential for some variability in key metrics). This is supported by a fairly contained claims ratio (FY19: 41%; five year average: 39%), and ability to realise cost efficiencies that have seen the total expense ratio reduce to 53% at FY19 (five year average: 58%). Furthermore, conservative reinsurance protection and continued programme support from core reinsurers also contribute to sound overall earnings management. GCR notes the exposure of the credit profile to underwriting margin volatility (FY19: 5.3%; FY18: 10%; FY17: 3%). This is a function of the sectors in which Lombard operates, noting its interlinkages with the economy (particularly sectors such as construction and trade credit which have experienced significant strain of late). Earnings are expected to remain mildly positive to the rating, with Lombard’s demonstrated management of tough sectoral cycles and strong reinsurance relationships expected to preserve positive underwriting margins over the short to medium term, albeit noting potential for cyclical spikes.

Capitalisation is viewed to be moderately positive to the rating, with Lombard’s sound risk adjusted capitalisation being offset by group funding requirements that induces volatility in regulatory risk adjusted capital metrics. GCR also notes the use of Tier II capital within the funding structure, with the insurer’s tolerance for gearing up to 50% of the Solvency Capital Requirement (“SCR”) viewed to introduce moderately high leverage into the capital structure, adding an extra layer of risk in economic downturns and diluting capital quality somewhat. Going forward, the insurer’s SCR coverage is expected to trend within a sound range, noting potential balance sheet optimisation at a group level which could positively impact the factor assessment if successfully executed.

Lombard’s competitive positioning is viewed to be moderate, with a market share of 1.4%, complimented by brand strength in speciality insurance segments. While premium generation has been negatively impacted by deteriorating economic conditions (particularly in certain core market segments that Lombard operates), the insurer is expected to defend its existing market share given the good mix of premiums across multiple divisions. In this regard, premium diversification is supported by established revenue streams from four business lines (also noting its market leadership position in certain guarantee sub segments) and moderately low product risk, countered by limited global presence. Going forward, Lombard is in the process of diversifying revenue across geographic regions, targeting regional African business, as well as the Australian market. While South Africa remains the core revenue contributor, incrementally higher premiums from stronger external markets may positively impact on the business profile over the medium to long term.

Outlook Statement

The Stable Outlook reflects the expectation for the insurer’s credit profile to exhibit similar characteristics over the short term, with sustained liquidity strength and well managed capitalisation and cross-cycle earnings (albeit noting potential for some variability in key metrics) being moderated by a stable market share and limited premium diversification.

Rating Triggers

Upward rating movement may follow a sustained improvement in earnings, coupled with strengthening in risk adjusted capitalisation. Conversely, 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 long term issue rating is sensitive to interest coverage tracking substantially below expectations, or gearing metrics being consistently elevated.

Analytical Contacts

Primary analyst Vinay Nagar Senior Credit Analyst: Insurance Ratings
Johannesburg, ZA Vinay@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, June 2019
GCR Insurance Sector Risk Scores, July 2019

Ratings History

Rated Entity / Issue Rating class Review Rating scale Rating Outlook/Watch Date
Lombard Insurance Company Limited Claims paying ability Initial National A(ZA) Stable Outlook March 2004
Last National A+(ZA) Stable Outlook November 2018
Long term issuer Initial/last National A(ZA) Stable Outlook October 2019
LOM01 Long term issue Initial National BBB+(ZA) Stable Outlook November 2014
Last BBB+(ZA) Stable Outlook November 2018
LOM02 Long term issue Initial/last National BBB+(ZA) Stable Outlook October 2019

Risk Score Summary

Risk score
Operating environment 16.25
Country risk score 7.50
Sector risk score 8.75
Business Profile -1.75
Competitive position -0.75
Premium diversification -1.00
Management and governance 0.00
Financial profile 0.75
Earnings 0.25
Capitalisation 0.25
Liquidity 0.25
Comparative profile 0.00
Peer analysis 0.00
Total Score 15.25

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Regulatory Capital The total of primary, secondary and tertiary capital.
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.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
Total Expense Ratio Measures the ability of the insurer to manage expenses associated with core operating activities.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.

SALIENT POINTS OF ACCORDED RATING

GCR affirms that a.) no part of the rating process 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Lombard Insurance Company Limited. 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.

Lombard Insurance Company Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Lombard Insurance Company Limited and other reliable third parties to accord the credit ratings included:

  • The audited financial results to 30 June 2018
  • Four years of comparative audited numbers
  • Unaudited interim results up to 31 May 2019
  • Budgeted financial statements for 2019
  • Other related documents.


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