Johannesburg, 31 July 2018 — Global Credit Ratings has today downgraded the national scale claims paying ability rating accorded to Lion of Africa Insurance Company Limited to BB-(ZA) from BBB(ZA). The rating has been placed on Rating Watch and will be reviewed before 31 October 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Lion of Africa Insurance Company Limited (“Lion”) based on the following key criteria:
The rating downgrade considers the material weakness in Lion’s earnings relative to expectations in FY17, with the insurer recording a R94m net after tax loss, despite corrective measures implemented in recent years. This in turn drove a pronounced deterioration in risk adjusted capitalisation, with the international solvency margin receding to 54% from the high of 202% reported at FY16, while interim capital adequacy requirement cover stood at 1.1x at FY17 (FY16: 4.1x). In this respect, the risk of not achieving capitalisation targets over the short term is viewed by GCR to be materially elevated.
The rating has been placed on Rating Watch given potential for the abovementioned factors to persist at weakened levels over the outlook horizon. In this respect, despite the insurer’s plans to address weak solvency levels over the short term, this would need to be accompanied by the successful turnaround in net performance to contain further capital depletion. Accordingly, GCR will closely monitor developments over the coming three months.
The insurer registered a deep underwriting loss of R101m in FY17, which was significantly worse than budget and GCR’s stressed case projections. In GCR’s view, despite remedial measures implemented towards the end of FY17, GCR expects earnings capacity to remain weak over the outlook horizon, given the increase in public sector claims frequency, as well as potential operational challenges associated with simultaneous management of a number of new portfolios. Accordingly, the rating is sensitive to further earnings strain in the absence of a demonstrated and sustainable turnaround in underwriting performance.
The spike in net claims and technical provisions resulted in a moderation in liquidity metrics to intermediate levels, from the very strong levels posted in the prior year, while liquidity may be susceptible to further compression in the event of continued operational strain and in the absence of recapitalisation. In this regard, cash holdings were sufficient to cover net technical liabilities at 5M F18, albeit at a reduced 1x (FY17: 1.4x).
Lion’s competitive position is viewed to be limited, with its share of industry GWP equating to around 0.4% in FY17. Despite the high short term growth projections, GCR expects Lion’s competitive position to remain modest, given the currently low premium base.
The rating is highly sensitive to a continued shortfall in solvency should remediation plans not materialise within the expected timeframe. Furthermore, negative rating action could follow if risk based capitalisation continues to trend at weakened levels in the absence of a sustainable turnaround in earnings capacity. Conversely, the rating outlook may revert to stable if capitalisation metrics strengthen materially and the insurer is able to demonstrate a sustainable execution of its turnaround strategy.
|NATIONAL SCALE RATINGS HISTORY|
|Initial / last rating (May 2017)|
|Claims paying ability: BBB(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Yvonne Mujuru|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
RSA Short Term Insurance Bulletins, 2001 – 2017
Lion rating report, 2017
RATING LIMITATIONS AND DISCLAIMERS
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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.
Lion of Africa 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 has been disclosed to Lion of Africa Insurance Company Limited with no contestation of the rating.
The information received from Lion of Africa Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The latest unsigned financial statements to 31 December 2017
- Four years of comparative audited financial statements to 31 December
- Budgeted financial statements to 31 December 2018
- Year to date management accounts to 31 May 2018
- Quantitative statutory returns to 31 December 2017
- The current reinsurance programme summary
- Other relevant documents
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|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.|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|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.|
For a detailed glossary of terms please click here