Lagos Nigeria, 22 November 2019 – Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to Law Union and Rock Insurance Plc of A-(NG), with the outlook accorded as Stable. The rating is valid until September 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Law Union and Rock Insurance Plc (“LUR”) based on the following key factors:
LUR maintained a strong liquidity profile, supported by conservative asset allocation as evidenced by cash and equivalents accounting for a sizeable 78.1% of the investment portfolio at FY18. However, a sharp rise in net claims incurred during the year, saw liquidity metrics come under pressure, with the cash coverage of monthly claims and technical liabilities moderating to 47.9 months and 1.9x at FY18 (FY17: 90.9 months and 2.1x) respectively. Going forward, liquidity metrics are expected to remain within a strong range over the rating horizon, underpinned by prospects of sustained conservative asset allocation.
LUR’s capital base declined slightly by 1.4% to N6.4bn at FY18, on the back of implementation of IFRS 9 accounting standard and fair value loss on asset revaluation. In this regard, the ratio of shareholders’ funds/ net earned premium moderated to 217.8% (FY17: 247.2%), albeit remaining above the review period average of 197.3%. Furthermore, in an effort to comply with the new regulatory minimum capital requirement for its operational licence class, management has indicated plans to merge with another non-life insurer before the end of June 2020. Based on the foregoing, GCR expects the insurer’s capital base to remain within a strong range to cater for the quantum of market and insurance risk assumed.
The insurer’s earnings capacity measured at moderately strong levels over the review period, largely supported by a robust realised investment income. In this regard, operating margin averaged 17.0% over a five-year period (FY18: 16.3%). However, underwriting performance remained weak and has exhibited a level of volatility over the review period, impacted by fluctuating claims. While earnings capacity could slightly be constrained within the short term by the associated cost of business combination, GCR expects the positive effects of business synergy to support profitability over the medium to long term.
LUR’s business profile is considered to be limited, with the fairly-diversified premium base being constrained by a modest 2.2% market share of the non-life business in FY17. In this respect, four lines of business contributed materially to the premium base, while market share has been somewhat restrained by fluctuating premium growth. Going forward, the anticipated business combination, coupled with the sustained retail segment penetration drive could further enhance the insurer’s competitive position.
The reinsurance programme consist of counterparties with sound aggregated credit profile. The maximum net retention per risk and event is considered conservative, equating to a moderate 6.3% of FY18 capital.
Upward rating or outlook movement may follow attainment of sustainable underwriting profitability and an improvement in market share, while maintaining liquidity and solvency metrics at strengthened levels. The rating would be sensitive to a sustained deterioration in key credit protection metrics and/or sustained weakness in earnings capacity.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2014)
Claims paying ability: BBB+(NG)
Rating outlook: Positive
Last rating (October 2018)
Claims paying ability: A-(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Nigeria Short Term Insurance Bulletin, 2018
Glossary of Terms/Ratios (February 2016)
LUR reports, 2014- 2018
RATING LIMITATIONS AND DISCLAIMERS
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.
The rating was solicited by, or on behalf of, Law Union and Rock Insurance Plc., and therefore, GCR has been compensated for the provision of the rating.
Law Union and Rock Insurance Plc. 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 above was disclosed to Law Union and Rock Insurance Plc.
The information received from Law Union and Rock Insurance Plc. and other reliable third parties to accord the credit rating included:
• Audited financial statements to 31 December 2018
• Four years of comparative audited numbers
• Management accounts to 30 September 2019
• Budgeted financial statements for 2019
• 2019 reinsurance cover notes
• Actuarial valuation to 31 December 2018
• Other related documents.