Announcements Insurance Rating Alerts

GCR downgrades Lion of Africa Insurance Company Limited’s national scale financial strength rating to CCC-(ZA), Negative Watch

Rating Action

Johannesburg, 11 December 2019 – GCR Ratings (“GCR”) has downgraded Lion of Africa Insurance Company Limited’s (“Lion of Africa”) national scale financial strength (formerly claims paying ability) rating to CCC-(ZA), from CCC(ZA), with the rating maintained on Negative Watch.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Lion of Africa Financial strength National CCC-(ZA) Negative Watch

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

Rating Rationale

The rating downgrade reflects the weakening in Lion of Africa’s credit profile since it went into voluntary run-off in November 2018. In this respect, increased operational cash flow strain, together with higher than expected claims provision adjustments, resulted in a reduction in GCR’s assessment of stressed liquidity relative to levels reflected during the prior rating review.

The rating is very sensitive to a further weakening in liquidity, considering potential for monthly cash flow mismatches stemming from uncertainty regarding the timing and quantum of future claims settlements and associated reinsurance recoveries. Accordingly, the insurer may be increasingly reliant on additional liquidity injections if stressed case scenarios materialise. GCR will monitor developments over the short term, with the maintenance of the rating’s Negative Watch factoring in potential for increasing liquidity strain relating to these uncertainties.

Outlook Statement

The Negative Watch reflects the likelihood of negative rating action if liquidity weakens below expectations and planned corrective actions are not implemented timeously.

Rating Triggers

The rating will most likely be downgraded if the net liquidity position measures below expectations over the near term. Deviations in actual and/or expected claims settlement values, and/or timing, may result in negative rating action, particularly if GCR views this to increase risk of future matching of liquidity inflows to claims settlement obligations.

Analytical Contacts

Primary analyst Susan Hawthorne Senior Analyst: Insurance Ratings
Johannesburg, ZA Susanh@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA Godfreyc@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, November 2019

Ratings History

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National BBB(ZA) Stable May 2017
Last National CCC(ZA) Rating Watch November 2018

Glossary

Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
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.
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 under a policy or policies of insurance, which it has issued.
Rating Horizon The rating outlook period

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 rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to Lion of Africa Insurance Company Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Lion of Africa 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 Lion of Africa Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results to 31 December 2018
  • Unaudited management accounts to 31 March 2019, 30 April 2019, 30 June 2019 and 31 October 2019
  • Other related documents.
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