Lagos Nigeria, 06 January 2020 — Global Credit Ratings has affirmed both the national and international scale claims paying ability ratings assigned to Nigeria Reinsurance Corporation at BBB+(NG) and B respectively. The ratings have been placed on ‘Watch’, which GCR expects to resolve by June 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nigeria Reinsurance Corporation (“Nigeria Re” or “the reinsurer”) based on the following key factors:
Nigeria Re’s ratings have been placed on “Watch” to reflect the short fall in statutory solvency margin at FY18 and the need for additional capital to meet the new regulatory minimum. In this regard, a solvency deficit of N2.7bn was reported at the balance sheet date, which translated to lower 0.7x statutory asset coverage of liabilities (FY17:1.8x). To address this concern as well as comply with the new regulatory capital requirement, management has indicated plans to raise additional capital from existing shareholders within the next 12 months.
Total shareholders’ funds stood at N19.6bn at FY18 and sufficiently catered for the low insurance and market risk assumed. As such, shareholders’ funds covered net earned premium by a sizeable 22.7x and 26.9x at FY18 and 10M FY19 respectively.
Despite the investment portfolio being heavily weighted towards investment properties, liquidity metrics have consistently been maintained at a strong level, on the back of the low exposures to underwriting risk. That said, the substantial rise in claims experience during the year, saw the cash coverage of average monthly claims and net technical liabilities moderate to 37.9 months and 2.8x at FY18 (FY17: 41.4 months and 3.7x) respectively. GCR expects liquidity metrics to remain at similar levels over the rating horizon, underpinned by management’s commitment to place available operating cash flows in liquid assets, coupled with limited risk exposures.
Earnings capacity measured at a weak level, with sound investment income largely offset by limited underwriting performance, which has persistently constrained the reinsurer’s profitability potential over the review period. In this regard, the investment yield equated to 2.7%, while underwriting margin was registered at negative 69.7% in FY18. Specifically, underwriting performance during the year was largely impacted by the spike in claims experience and elevated cost structure, which may likely continue to constrain earnings capacity going forward, in the absence of scale efficiencies.
Competitive positioning remained very limited, with the reinsurer controlling an estimated market share of 4.7%. GCR perceives the potential for strong premium growth over the medium term, supported by an accommodative capital base.
The reinsurer’s earnings profile is considered moderate, with four of six lines of business contributing over 10% and collectively accounting for 91% (FY17: 92%) of gross premiums in FY18. In line with historical trend, the fire and general accident risks, as well as the group life, dominated the premium base, thus, exhibiting a moderately high aggregate product risk. The retrocessionaire panel comprises counterparties with a sound aggregated credit profile. The maximum net retention per risk and event is considered very low, equating to a modest 0.8% of FY18 capital.
The international scale rating is constrained by Nigeria’s sovereign rating, given the fact that the reinsurer’s assets are entirely domiciled locally and the revenues are largely sourced domestically.
The rating may be adjusted upward following a track record of profitable growth and an improved market share over the medium term. This would also be supported by risk adjusted capitalisation and liquidity metrics remaining at strong levels. However, negative rating action may arise should the reinsurer record a sustained weakening in earnings capacity and/or competitive position. Also, inability of the reinsurer to meet the new regulatory required capital within the allowed timeframe may lead to a negative rating action.
NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (October 2014) Initial rating (October 2014)
Claims paying ability: BBB+(NG) Claims paying ability: B
Outlook: Evolving Outlook: Evolving
Last rating (December 2018) Last rating (December 2018)
Claims paying ability: BBB+(NG) Claims paying ability: B
Outlook: Stable Outlook: Stable
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance, updated May 2018
Criteria for Rating Long Term Insurance, updated May 2018
Glossary of Terms/Ratios (February 2016)
Nigeria Re rating reports, 2014-2018
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The ratings were solicited by, or on behalf of, Nigeria Reinsurance Corporation, and therefore, GCR has been compensated for the provision of the ratings.
Nigeria Reinsurance Corporation 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 ratings above were disclosed to Nigeria Reinsurance Corporation.
The information received from Nigeria Reinsurance Corporation and other reliable third parties to accord the credit ratings included:
• Audited financial results to 31 December 2018
• Four years of comparative audited financial statements
• Unaudited interim results to 31 October 2019
• Budgeted financial statements for 2019
• The current year retrocession cover notes, and
• Other related documents.