Lagos Nigeria, 14 August 2019 – 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 July 2020.
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’s risk adjusted capitalisation has consistently strengthened over the last five-year, underpinned by the sizeable and growing capital base catering for the quantum of insurance and market risk exposures. In this regard, the ratio of shareholders’ funds/ net earned premium (“NEP”) rose to a review high of 116.2%, while statutory solvency coverage remained elevated at 2.7x at FY18. Going forward, a widening in profit margins, in tandem with projected growth in premium scale, coupled with relatively well contained dividend distributions, is likely to sustain risk adjusted capitalisation within a very strong range over the rating horizon.
Liquidity is considered to be strong, underpinned by the insurer’s conservative investment strategy, with a substantial 67.3% of investment funds placed in cash and equivalents. Accordingly, key liquidity metrics registered at very strong level, with cash coverage of average monthly claims and net technical provisions equating to 36.2 months and 1.1x respectively (FY17: 44 months and 1.0x). GCR expects liquidity metrics to remain within a strong range going forward, supported by sound operating cash flow generation and conservative asset allocation.
Sound competitive positioning is supported by the insurer’s consolidated position in the market, with an estimated 6.6% market share of non-life industry gross premiums. Increasing brand acceptability, as well as established broker relationships, are expected to further support market traction and defend the insurer’s current market position over the outlook horizon.
NEM’s premium spread reflects a reasonable level of diversification, with each business class exhibiting material premium scale, contributing over 10% of gross premiums. Similarly a well-diversified risk spread has been maintained over the review period, with granular motor risksrepresenting 42.7% of NEP in FY18, maintaining the insurer’s low product risk profile.
The insurer’s earnings capacity has been maintained at sound levels over the review period, supported by very strong underwriting profitability. In this respect, the five year aggregate underwriting margin equated to 13%, supported by a favourable loss ratio (five year average: 30%), with robust realised investment income augmenting income streams. Accordingly, the operating margin equated to 25.9% in FY18 (five-year average: 20.2%), albeit with bottom-line profitability moderated by volatile unrealised investment income. Going forward, GCR expects earnings capacity to be sustained within a sound range, given a well contained claims experience, coupled with a consistent stream of realised investment income.
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 1.4% of FY18 capital.
An upward rating movement could follow the strengthening of the insurer’s business profile supported by reduced volatility in earnings capacity. However, the rating will be sensitive to a marked deterioration in in operating performance and/or key credit protection metrics.
NATIONAL SCALE RATINGS HISTORY
Initial rating (August 2009)
Claims paying ability: A-(NG)
Rating outlook: Stable
Last rating (July 2018)
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- 2018
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 2018
• Four years of comparative audited numbers
• Management accounts to 31 March 2019
• Budgeted financial statements for 2019
• 2019 reinsurance cover notes
• Actuarial valuation to 31 December 2018
• Other related documents.