Lagos Nigeria, 21 January 2019 — 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, with the outlooks accorded as Stable. The ratings are valid until November 2019.
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 capital base remained sizeable at N19.6bn at FY17, supporting robust risk adjusted capitalisation. In this regard, the reinsurer evidenced significant capital buffers, further supported by very limited underwriting risk. As such, shareholders’ funds covered net earned premium by 20.6x at FY17, while an adjustment for low yielding investment property (comprising a substantial 80% of FY17 consolidated capital) reduces the metric to 5.6x. Going forward, risk adjusted capitalisation is likely to remain within a very strong range, given a fairly stable risk profile, although significant risks could arise over the medium term if the quality of capital is not addressed.
Despite a significant investment portfolio tilted towards property, liquidity metrics were maintained within a very strong range, supported by low exposure to underwriting risk. In this respect, cash covered net technical provisions by 3.6x at FY17, while the claims cash cover ratio equated to 41 months (FY16: 3.7x and 61 months respectively). Liquidity metrics may remain at similar levels over the rating horizon, underpinned by management’s commitment to place operating cash flows into liquid assets, coupled with limited technical reserves. However, headroom within the very strong range is likely to moderate over the medium term on the back of persistent efforts to substantially expand the risk base.
Earnings capacity measured at a moderately weak level, with healthy investment income offset by limited underwriting performance. In this respect, the investment yield equated to 3.2%, while an underwriting margin of -30.2% was recorded during the review year, with low earnings support provided by the life business. Notably, the reinsurer’s high operating expense ratio (review period average: 48%), coupled with a high and variable loss ratio represents a major constraint to an improvement in earnings capacity. In the absence of corrective action, these factors may continue to impact earnings over the medium term.
Competitive positioning remained very limited. Although gross premiums grew by a robust 60% in FY17, buttressed by life premiums, the reinsurer’s market share remained low at 4.7%. GCR perceives potential for rapid premium growth over the medium term, supported by an accommodative capital base and the ongoing brand awareness campaigns.
The reinsurer’s earnings profile is regarded to be sound, with four significant lines of business collectively accounting for 92% (FY16: 90%) of gross premiums. In line with norms, high value fire and accident risks, together with group life, dominate premiums, underpinning a moderately high aggregate product risk. Product risk is exacerbated by the reinsurer’s high risk retention on high value risks at a maximum deductible of 26% of net earned premiums, with the rest of the short term and the entire long term book written for the net account, albeit noting the intermediate aggregated level of credit strength exhibited by the retrocession panel.
Given that the majority of the reinsurer’s assets are domiciled in Nigeria, and the bulk of the revenue is derived locally, the international scale rating is constrained by Nigeria’s sovereign rating.
The rating may be adjusted upwards following a track record of profitable growth and an improved market share over the medium term. This would need to 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, material reduction in capitalisation and/or deterioration in the liquidity profile.
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 2017) Last rating (December 2017)
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, 2014-2017
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 2017
• Four years of comparative audited financial statements
• Unaudited interim results to 31 October 2018
• Budgeted financial statements for 2018
• The current year retrocession cover notes, and
• Other related documents.