TEXT-S&P rates Lion of Africa Insurance Co. 'BB+';outlook stable

The marginal competitive position is based on Lion's niche position and limited scale and market share in a market dominated by a small number of very large players. In addition, Lion distributes its product almost entirely through intermediaries, which is a weakness for the rating because it offers the insurer less control over the underwriting. Offsetting these weaknesses are Lion's competitive strengths. Under current South African legislation, companies are assessed according to their support for broad-based black economic empowerment (BBBEE). Lion's high status as a level 1 contributor differentiates it from the competition and indicates that it has a supportive shareholder with the same empowerment ethos.

Lion's marginal financial flexibility reflects our view of Lion's parent, Brimstone Investment Co. Ltd., and the company's limited access to other sources of funding. Nevertheless, we view Lion's current requirement for additional capital based on its plans for organic growth as low and expect it to meet its needs from retained earnings.

The economic and industry risk inherent in operating in South Africa is a weakness. We note some negative pressures from current social and economic imbalances in the country. These imbalances may, if they persist, result in the economy failing to generate jobs, cause lower levels of real GDP growth, and encourage investor risk aversion. Although we consider that Lion is well placed to benefit from the new regulatory framework, Solvency Assessment and Management (SAM), we expect the new framework to place a significant burden on companies and this is therefore a concern.

Operating performance is Lion's key strength. In 2011, the company achieved a net combined ratio of 98%, which is in line with its long-term performance. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) Loss performance has remained within a narrow range and high historical expenses have gradually reduced. Operating performance has also benefited from a reasonable return on investment; this has averaged 6.5% over the past three years.

We consider capitalization to be good, in part because of good investments and liquidity. Capitalization is built on good capital adequacy and adequate reserves and reinsurance. Lion has a prudent investment strategy. Its portfolio primarily focuses on liquid bonds and cash and limited exposure to equities.

Outlook

The stable outlook on Lion reflects our opinion that the company will continue to develop its competitive position in the South African market in both new and existing lines of business and that it will enter the wider African market. Under our base-case scenario, competition in the South African insurance industry is expected to remain intense. Premium growth for the industry is likely to be around or below the level of real GDP growth, which is predicted to average around 3% per year over the next two years. For Lion, this will mean continued pressure on pricing and underwriting margins, but we expect its targeted strategies will enable it to achieve gross premium written of around South African rand (ZAR) 1 billion for 2012.

Operating performance is expected to remain strong and reflect stable loss performance within the existing range of 50%-65% and a slight decline in net operating expenses. This is likely to result in a net combined ratio between 93% and 98%. We also expect Lion to maintain its capitalization at least at a good level, with interest and coverage ratios maintained within current tolerances.

We could consider lowering the ratings on Lion if major losses affect the company's financial profile or we see a sustained deterioration in operating performance and a weakening in the company's financial profile. A positive movement in the rating would likely be ultimately linked to the development of a successful track record that will see the company deliver on its strategic plans and increase diversity. This is likely to be demonstrated by its greater ability to control pricing, increase its market share, and sustain its profitability. This, together with risk management developments and continued management strength, would support an improvement in the company's business profile.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal.

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Group Methodology, April 22, 2009

-- Interactive Ratings Methodology, April 22, 2009

-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004

-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Criteria Update: Factoring Country Risk Into Insurer Financial Strength Ratings, Feb. 11, 2003

Ratings List

New Rating; CreditWatch/Outlook Action

Lion of Africa Insurance Co Ltd.

Counterparty Credit Rating

Local Currency BB+/Stable/--

Financial Strength Rating

Local Currency BB+/Stable/--

New Rating

Lion of Africa Insurance Co Ltd.

Counterparty Credit Rating

Local Currency zaA-/--/--