Announcements Insurance Rating Alerts

GCR upgrades Lidwala Insurance’s national scale financial strength rating to A+(SZ) from A(SZ) on sustained financial profile strength; Outlook Stable

Rating action

Johannesburg, 21 September 2021 – GCR Ratings (“GCR”) has upgraded Lidwala Insurance Company Limited’s (“Lidwala Insurance”) national scale financial strength rating to A+(SZ) from A(SZ), with a Stable Outlook.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
Lidwala Insurance Company Limited Financial strength National A+(SZ) Stable Outlook

Rating rationale

Lidwala Insurance’s rating reflects the insurer’s sustained improvement in capitalisation and liquidity, albeit some weakness has been noted in the earnings profile. The credit profile also benefits from a good market position, partially balancing limited premium diversification.

Risk adjusted capitalisation strengthened in FY21, supported by well contained exposures to insurance and market risks, coupled with sound internal capital generation and improved premium collection. As such, the GCR capital adequacy ratio (“GCR CAR”) increased to 2.6x at FY21 (FY20: 2.3x). Risk adjusted capitalisation is expected to be maintained within a strong range, albeit there is likely to become moderation in the metric to below the 2.0x level if premium growth targets are achieved and / or if dividend payments are made. The insurer’s ability to grow the capital base to counter these pressures over the rating outlook is considered a key rating consideration.

Review year liquidity strengthened following the receipt of outstanding reinsurance receivables coupled with sound cash generation from operations. As such, stressed financial assets coverage of net technical liabilities registered at 1.8x at FY21 (FY20: 1.4x), while operational cash coverage was maintained at 14 months. Liquidity strength is expected to be sustained over the outlook horizon.

Earnings moderated in FY21 negatively impacted by an increase in claims along with loss of earned premium scale, although investment income remained sound regardless of depressed investment markets. In this respect, net claims incurred rose to SZL23.0m (FY20: SZL21.8m) following an increase in retention, while the earned premium base contracted to SZL52.9m (FY20:SZL56.5m), with the loss ratio deteriorating to 45% (FY20: 39%: five-year average: 44%). As a result, the underwriting margin contracted to a review period low of 5.6% at FY21, measuring below the 5-year average underwriting margin of 7%. Despite observed resilience in net investment income, which closed the year at SZL6.1m (FY20: SZL8.5m), the moderation in underwriting profitability filtered through to bottom-line performance. Accordingly, net income after tax registered at SZL5.9m in FY21 (FY20: SZL8.8m), translating to a lower return on revenue of 12.8% (FY20: 15.5%; five-year average: 15.9%). Going forward, GCR expects earnings to register within the same range over the rating horizon.

Lidwala Insurance’s market share moderated slightly to c. 17% in FY21 (FY20: 18%) and remains much smaller than the market leader that enjoys an estimated 70% market share. The insurer’s ability to maintain its established position as the second largest player in the short-term insurance market is considered to be a relative strength. Premium diversification is limited, with three lines of business being material revenue contributors. However, the insurer is geographically concentrated to Eswatini.

Outlook statement

The Stable Outlook reflects GCR’s expectation that risk adjusted capitalisation and liquidity will be maintained within strong ranges, which will mitigate against potential earnings weakness. The business profile is likely to remain unchanged over the outlook horizon.

Rating triggers

Positive rating action is unlikely in the short term, but may stem from a sustained enhancement in underwriting performance resulting in strong growth in overall earnings over the medium to long term. This will help to consolidate liquidity and capitalisation strength. Conversely, downward rating pressure may arise from a further weakening in underwriting performance and capitalisation below expected levels.

Analytical contacts

Primary analyst Linda Matavire Analyst: Insurance Ratings
Johannesburg, ZA LindaM@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@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, August 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings history

Lidwala Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Financial strength Initial National A(SZ) Stable February 2020
Last National A(SZ) Stable September 2020

Risk score summary

Rating components and factors Risk score
Operating environment 5.25
Country risk score 2.25
Sector risk score 3.00
Business profile (0.50)
Competitive position 0.50
Premium diversification (1.00)
Management and governance 0.00
Financial profile 1.50
Earnings 0.00
Capitalisation 1.25
Liquidity 0.25
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 6.25

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Primary Market The part of the capital markets that deals with the issuance of new securities.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Repayment Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.
Retained Earnings Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
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.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
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 rating is based solely on the merits of rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. 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. The rated entity participated in the rating process via virtual 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 the rated entity and other reliable third parties to accord the credit rating included:

  • Draft financial statements to 30 June 2021;
  • Four years of comparative audited financial statements to 30 June;
  • Budgeted financial results to 30 June 2022;
  • Current year reinsurance cover notes; and
  • Other relevant information
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