Lion Africa outlook stable

By: Global Credit Rating (GCR)

GCR accords an initial rating of BBB(ZA) to Lion of Africa Insurance Company Limited; Outlook Stable

Global Credit Ratings (GCR) has assigned an initial national scale claims paying ability rating to Lion of Africa Insurance Company Limited (LoA) of BBB (ZA), with the outlook accorded as Stable.

“LoA implemented a strategic turnaround plan in Financial Year 2015 to address the factors that were driving large losses. As a result, a decision was taken to exit the personal lines and corporate segments,” says Yvonne Mujuru, Sector Head of Insurance Ratings at GCR.

At the same time, emphasis was placed on enhancing underwriting skills and pricing capabilities, while implementing a more stringent Risk Acceptance Guideline (“RAG”) for continuing lines of business. Together with the absence of large corporate exposures, these corrective measures are expected to contain the loss ratio at more industry-consistent levels going forward.

While implementing operational corrections, management also focused on strengthening the balance sheet by de-risking the investment portfolio and raising additional capital. This underpinned a strengthening in LoA’s nominal and risk adjusted capitalisation. The international solvency margin registered at 202% at Financial Year 2016 (prior four year average: 34%), while Interim CAR cover stood at 4.1 x (Financial Year 2015: 1 x).

“Capitalisation is expected to be sustained at strengthened levels over the outlook horizon, although it could be partially impacted by a shortfall in net performance relative to expectations. Capital adequacy is further supported by the strong reinsurance panel, with net deductibles limited to conservative levels against capital,” adds Mujuru.

The larger asset base and de-risking of the investment portfolio, together with a reduction in the risk base, have underpinned strong liquidity metrics over the past two years. Cash coverage of net technical liabilities equated to 2x at Financial Year 2016 (Financial Year 2015: 1x), while cash coverage of average monthly claims stood at 77 months (Financial Year 2015: 14 months). GCR expects key liquidity measures to remain strong over the rating horizon, given the conservative investment approach adopted.

The gradual reversion to underwriting profitability is expected to enhance earnings generation, with profitability metrics forecast to strengthen to moderately strong levels from Financial Year 2019 onwards (from the weak historical levels). Accordingly, the ability to successfully execute the expansion strategy, whilst containing loss ratios at industry-consistent levels, is expected to be a key rating driver over the medium to longer term.

Following corrective restructuring and cancellation of higher claiming business lines, the insurer’s market share reduced to 0.5% of total industry premiums, from around 1% at the start of the review period. Despite the strong medium term growth projections, GCR expects LoA’s competitive position to remain modest, given the currently low premium base. The earnings profile evidences a reasonable degree of diversification by line of business, with note taken of the fairly contained product risk associated with the property and motor orientated portfolios.

“Positive rating movement over the medium term could follow the successful execution of the turnaround strategy, resulting in sustainably stronger underwriting profitability. This would need to be accompanied by strong credit protection metrics. In contrast, a weakening in capitalisation and/or liquidity, following deviations from forecast expectations, could result in negative rating action,” concludes Mujuru.