Announcements

GCR issues BBB+(ZA) rating to Lombard’s Unsecured Subordinated Notes; Outlook Stable.

Johannesburg, 25 Nov 2014 — Global Credit Ratings has today accorded a long term rating of BBB+(ZA) to the following unsecured subordinated notes (“the Notes”) issued on 25 November 2014 by Lombard Insurance Company Limited (“Lombard” or “the Issuer”):

 R200,000,000 unsecured subordinated floating rate notes (Stock code LOM01), which mature on 25 November 2019.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to the Notes based on the following key criteria:

In line with GCR’s methodology, Lombard’s claims paying ability rating forms the basis for the issue rating, with the latter notched down to reflect subordination of debt funders to policyholders. In this regard, Lombard carries a GCR claims paying ability rating of A+(ZA) (reviewed and reaffirmed on 17th November 2014), and GCR has a applied a three notch differential to the unsecured subordinated debt issue rating.

The Notes were issued under Lombard’s R1bn Unsecured Subordinated Note Programme, with no further issues planned in the next two years. Based on the Programme Memorandum, the debt issue will comply with the requirements under the Third South African Quantitative Impact Study (“QIS3”) guidance, and is expected to enhance longer term statutory capital adequacy. The funds will be invested in a portfolio of cash and near cash, which appropriately matches liabilities within the current regulatory regime. Gross and net interest coverage ratios are projected at sound levels throughout the forecast horizon. Furthermore, financial leverage is deemed to be moderate, with gross gearing forecast at less than 35% over the next four years, while the insurer is expected to be ungeared on a net basis. After accounting for expected policyholder liabilities, forecasts point to a net gearing ratio of 36% at FYE15. This is projected to reduce to a net ungeared position by FYE18.

The Tier II capital will be used to enhance regulatory capital coverage (particularly in the lead up to Solvency Assessment and Management –“SAM”) and support medium to longer term growth. Following retained earnings of R23m and a R54.6m capital injection, Lombard’s international solvency margin registered at a strong 114% at FYE14, excluding Tier II capital. The proposed SAM framework allows for Tier II capital to contribute the lower of 50% of SCR and the Tier II amount. Including admissible Tier II capital (the full R200m), statutory CAR is expected to be maintained above 2x, while international solvency is projected to be above 100% over the rating horizon.

A strengthening in Lombard’s claims paying ability rating could support an upward revision of the subordinated debt issue rating. In contrast, a weakening in Lombard’s claims paying ability rating and/or deterioration in debt serviceability measures could result in downward rating pressure

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NATIONAL SCALE RATINGS HISTORY

Initial/last rating (Nov/2014)
Unsecured Subordinated Notes: BBB+(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Susan Hawthorne
Analyst
(011) 784-1771
Susanh@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
Chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Short Term Insurance and Reinsurance Companies, Updated July 2014
Criteria for Rating Insurers’ Debt and Hybrid Equity Instruments, Updated July 2014

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 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 2014 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements for F15 and forecasts to FYE18, unaudited year to date management accounts to September 2014, the signed Programme Memorandum, signed Applicable Pricing Supplement and signed Legal Opinion from Edward Nathan Sonnenbergs Inc., and other relevant documentation.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Assets

The items on the balance sheet of the insurer which show the value of property owned.

Balance Sheet

An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.

Claim

A request for payment of a loss, which may come under the terms of an insurance contract.

Commission

A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.

Equity

The money value of an insurance company that is over and above its liabilities.

Insurance

A formal social device for reducing risk by transferring the risks of several individual entities to an insurer. The insurer agrees, for a consideration, to assume, to a specified extent, the losses suffered by the insured.

Insurance Company

Any corporation primarily engaged in the business of furnishing insurance protection to the public.

Insured

A person or organisation covered by an insurance policy, including the “named insured” and any other parties for whom protection is provided under the policy terms.

Insurer

The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.

Interest

Money paid for the use of money.

Liabilities

Money owed or expected to be owed.

Policyholder

The person in actual possession of an insurance policy.

Securities

Evidences of a debt or of ownership, as stocks, bonds, and checks.

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.

Statutory

Required by or having to do with law or statute.

Surplus

The excess of assets over liabilities. Statutory surplus is an insurer’s or reinsurer’s capital as determined under statutory accounting rules. Surplus determines an insurer’s or reinsurer’s capacity to write business responsibility for only that portion of any risk, which exceeds the company’s established retentions.

GCR issues BBB+(ZA) rating to Lombard’s Unsecured Subordinated Notes; Outlook Stable.

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