Johannesburg, 07 Mar 2014 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Sovereign Trust Insurance Plc of A-(NG); with the rating placed on Rating Watch. The rating(s) are valid until 6/2014.
Global Credit Ratings has accorded the above credit rating(s) on Sovereign Trust Insurance Plc (“STI”) based on the following key criteria:
STI is viewed to hold a moderately strong market position in the Nigerian short term insurance industry, having achieved a healthy gross premium compound annual growth rate of 19% over the review period. Earnings are viewed to be fairly well diversified, albeit the high weighting of energy business does, however, expose the insurer’s revenue to the oscillations of project streams and annual renewal process within this sector.
Capital adequacy reduced substantially following the transition to International Financial Reporting Standards (“IFRS”). Furthermore, STI was unable to meet the statutory solvency requirement as at FYE12, as a shortfall of N1bn was recorded. This poses regulatory risk, and is a source of concern to GCR. However, the insurer is looking to raise additional capital to the value of approximately N1.7bn (through a rights issue and foreign institutional investors) to bolster shareholder’s funds. Furthermore, subdued growth may offer some solvency relief over the short term.
Relative to risk provisions, the insurer’s liquidity risk is viewed to be moderately high, with cash coverage of net technical reserves deteriorating to a low 0.3x at FYE12. Cash coverage of average monthly claims is adequate, however, at 16 months. While note is taken of the low average loss ratio of 25% (budgeted to persist going forward), the insurer’s underwriting margin continues to be exposed to expense constraints, with a high delivery cost ratio of 69% expected in F13.
New regulatory guidelines on insurance premium collections and remittances prohibit underwriters from providing policy cover without premium collection. This bodes well for asset quality at an industry level going forward, given the persistently high level of premium receivables and concomitant asset write-downs evidenced historically. The stringent execution of the cash and carry policy represents an important factor over the rating horizon.
Upward movement on the rating or outlook may arise following an improvement in solvency levels coupled with the strengthening of liquidity metrics as well as sustained profitable premium growth. Negative rating action may follow the insurer’s continued inability to meet the regulatory solvency margin and/or a further deterioration in the shareholder’s funds to NWP. A weakening in liquidity metrics as well as decline in profitability may also result in downward ratings pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Nov/2007)|
|Claims paying ability: A-(NG)|
|Last rating (Oct/2012)|
|Claims paying ability: A-(NG)|
|+234 1 462 2545|
|Sector Head: Insurance|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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.
Sovereign Trust 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/s has been disclosed to Sovereign Trust Insurance Plc with no contestation of the rating.
The information received from Sovereign Trust Insurance Plc and other reliable third parties to accord the credit rating included 2012 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, full year detailed budgeted financial statements, year to date management accounts to September 2013, the current year reinsurance cover notes, reserving methodologies, and other related rating information.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.