Lagos Nigeria, 14 December 2020 – 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 October 2021.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Law Union and Rock Insurance Plc (“LUR” or “the insurer”) based on the following key factors:
LUR became a wholly-owned subsidiary of Kanuri LUR Limited in September 2020 after a 100% acquisition. The acquisition was triggered by the insurer’s need to shore up its capital base to comply with the new regulatory capital requirement. While cognisance is taken of the potential benefit from the new shareholder (in terms of increased access to funding), the imminent change in brand name may impact on the insurer’s competitive profile, given the sensitivity of the local insurance market.
LUR’s risk adjusted capitalisation remains very strong, underpinned by the sizeable capital base catering for the quantum of insurance and market risks assumed. Shareholders’ funds grew by 12.3% to N7.2bn at FY19 and stood firmer at N7.4bn at 3Q FY20, supported by high earnings retention. As a result, the ratio of shareholders’ funds to net earned premium improved to 235% at 3Q FY20 (FY19: 226.3%, five-year average: 209.2%). Going forward, GCR expects the planned capital injection to further strengthen capital base and allow for more risk uptake over the outlook horizon.
LUR maintained a very strong liquidity position, supported by conservative asset allocation as evidenced by cash and equivalents accounting for a sizeable 76.4% of the investment portfolio at FY19. This, coupled with the moderation in claims incurred during the year, saw cash coverage of average monthly claims and technical liabilities improve to 66.3 months and 2x in FY19, respectively (FY18: 47.9 months and 1.9x). GCR expects liquidity metrics to remain within a very strong range over the rating horizon, underpinned by sustained conservative asset allocation and the impending capital injection.
The insurer reflects weak underwriting margins, due to the relatively high cost structure. As a result, operating profitability is driven by realised investment income, with the operating margin averaging 18.7% over a five-year period (FY19: 16.5%, FY18: 16.3%). Net earnings have evidenced volatility over the review period, largely a function of variability in unrealised investment income which peaked at N414.8m in FY19 (FY18: N3.4m). In this regard, net profit after tax grew over three-fold to N802.8m and translated to a higher return on average equity of 11.9% in FY19 (FY18: 4.1%). In the near term, GCR expects LUR’s earnings capacity to be adversely impacted by the relatively low-interest rates and the potential escalation in claims arising from the wanton destruction of properties across the country (a fallout from the nationwide protest).
LUR’s business profile is considered to be limited, with the fairly-diversified premium base being constrained by a moderate 2% market share of the non-life gross written premium. In this respect, four lines of business contributed materially to the premium base, while market share has been somewhat restrained by the relatively modest premium growth vis-à-vis the industry’s average growth over the review period.
The reinsurance programme consists of counterparties with sound aggregated credit profile. The maximum net retention per risk and event is considered conservative, equating to a moderate 5.6% of FY19 capital.
Upward rating or outlook movement may follow attainment of sustainable underwriting profitability and an improvement in competitive position, while maintaining liquidity and solvency metrics at very strong levels. However, the rating would be sensitive to a material deterioration in key credit protection metrics and earnings capacity as well as a significant moderation in competitive position that could ensue from the imminent change in brand name.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2014)
Claims paying ability: BBB+(NG)
Rating outlook: Positive
Last rating (November 2019)
Claims paying ability: A-(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Glossary of Terms/Ratios (February 2016)
LUR reports, 2014- 2019
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 2019
- Four years of comparative audited numbers
- Management accounts to 30 September 2020
- Budgeted financial statements for 2020
- 2019 reinsurance cover notes
- Actuarial valuation to 31 December 2019
- Other related documents.