Lagos Nigeria, 10 August 2020 – Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to NEM Insurance Plc of A(NG), with the outlook accorded as Stable. The rating is valid until June 2021.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to NEM Insurance Plc’s (“NEM” or “the insurer”) based on the following key factors:
NEM consistently displayed strong risk adjusted capitalisation over the review period, underpinned by the sizeable capital base catering for the quantum of insurance and market risk exposures. However, higher growth in net earned premium (“NEP”) vis-à-vis the capital base saw the ratio of shareholders’ funds to NEP moderate to 111.6% in FY19 (FY18: 116.2%, five-year average: 98.2%), while statutory solvency coverage remained strong at 2.9x at FY19 against the regulatory minimum of 1x. Going forward, sound internal capital generation and relatively well-contained dividend distributions are likely to sustain risk adjusted capitalisation within a very strong range over the rating horizon.
The insurer’s liquidity profile is considered strong, supported by a conservative investment strategy, with a substantial 67.3% of investment funds placed in cash and equivalents. Nonetheless, the significant rise in claims payments during the year, saw the cash coverage of average monthly claims moderate for the second consecutive year to 30.5 months (FY18: 36.2 months), while cash coverage of net technical liabilities stood flat at 1.1x at FY19. GCR expects liquidity metrics to remain within a strong range, supported by sound operating cash flow generation and conservative asset allocation.
NEM’s competitive position remained strong, supported by sound brand strength, well-entrenched relationships with brokers, and sustained penetration into the retail segment. As such, the insurer continued to defend its market position, with a 6.6% market share of the non-life gross written premium. NEM’s potential to maintain market position is largely dependent on its business retention rate relative to peers over the rating horizon, amidst the economic downturn.
NEM evidenced a well-diversified premium base, with four of five business lines exhibiting material premium scale, contributing over 10% of NEP in FY19. The motor business maintained dominance of the premium base, representing 42.5% of NEP in FY19. Overall, product risk is fairly limited.
The insurer’s earnings capacity registered at an intermediate level in FY19, largely a function of the spike in claims and the relatively low investment yields in the operating environment. In this regard, the underwriting margin and investment yield declined to 6.6% and 6.7% in FY19 (FY18: 17.0% and 8.7%), respectively. In the near term, earnings capacity could be adversely impacted by the COVID-19 pandemic, given downside risks associated with elevated claims and pressures on premium volumes, as well as potential for low-interest rates to persist.
The reinsurance programme reflects a moderately high level of counterparty strength. The maximum net retention per risk and event is considered conservative, equating to a low 2.2% of FY19 capital.
An upward rating movement could follow the strengthening of the insurer’s business profile as well as a significant increase in earnings capacity. However, the rating is sensitive to a marked deterioration in earnings capacity and key credit protection metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (August 2009)
Claims paying ability: A-(NG)
Rating outlook: Stable
Last rating (August 2019)
Claims paying ability: A(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance and Reinsurance Companies, updated May 2018
NEM Insurance Plc rating reports, 2009- 2019
Nigeria Short Term Insurance Bulletin, 2007-2018
Glossary of Terms/Ratios (February 2017)
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, NEM Insurance Plc, and therefore, GCR has been compensated for the provision of the rating.
NEM 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 NEM Insurance Plc.
The information received from NEM Insurance Plc and other reliable third parties to accord the credit rating included:
- Audited financial results to 31 December 2019
- Four years of comparative audited numbers
- Management accounts to 30 June 2020
- Budgeted financial statements for 2020
- 2020 reinsurance cover notes
- Actuarial valuation to 31 December 2019
- Other related documents.