Lagos Nigeria, 19 March 2020 – Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to Sovereign Trust Insurance Plc of A-(NG). The rating has been placed on ‘Watch’, which GCR expects to be resolved by September 2020.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Sovereign Trust Insurance Plc (“STI”) based on the following key factors:
STI’s capital base stood at N5.8bn at FY18 and increased to N7.7bn at 4Q FY19, underpinned by N1.5bn capital injection through Rights Issue. The capital raising exercise was part of STI’s effort to comply with the new capital requirement for its operational licence category. Furthermore, management has indicated imminent plans to raise additional capital through private placement in FY20, while also considering possible business integration opportunities within its subsector (non-life business) during the period. Based on the foregoing, the rating is placed on “Watch” to enable GCR monitor STI’s progress with the planned recapitalisation as well as business integration.
The insurer’s liquidity profile is considered to be strong, underpinned by the conservative asset allocation and sound operating cash flow generation. In this regard, cash coverage of technical liabilities increased to 2.1x at 4Q FY19 (FY18: 1.6x, FY17: 1.2x), while the average monthly claims coverage stood at 37.9 months at 4Q FY19 (FY18: 33.5 months, FY17: 35.7 months). Liquidity metrics are expected to remain at a strong range over the rating horizon, supported by sound cash flow generation (particularly through additional capital) as well as a conservative asset allocation.
The insurer’s earnings capacity strengthened during the review period, supported by improved underwriting profitability (supplemented by cost curtailment measures) and robust realised investment income. Accordingly, operating margin peaked at 12.7% in 4Q FY19 (FY18: 11.8%, five-year average: 7.7%), while investment yields evidenced some degree of variability over the review period due to fluctuations in fair value gains. Going forward, GCR is of the opinion that earnings capacity might be somewhat constrained by the declining investment yields in the operating environment which may likely inhibit investment income over the short term.
STI maintained a fairly sound business profile, which is supported by a moderately strong competitive position. The insurer’s competitive position has in recent time been driven by its improved brand acceptance, marketing efforts as well as established broker relationships. Also, a fair level of earnings diversification was maintained, with five of six lines of business contributing materially to the premium scale. GCR takes cognisance of the potential for further growth in market share going forward, predicated on the possible benefits of the merger and an enhanced capital base to strengthen the business profile over the short to medium term horizon.
The reinsurance programme consists of counterparties with sound aggregated credit profile. The maximum net retention per risk and event is considered conservative, equating to a moderate 4.2% of FY18 capital.
An upward rating movement may follow a substantial increase in market share, coupled with sustained improvement in profitability and liquidity metrics. The rating may be sensitive to material deterioration in key credit protection metrics, and earnings capacity.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2017)
Claims paying ability: A-(NG)
Rating outlook: Stable
Last rating (February 2019)
Claims paying ability: A-(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Nigeria Short Term Insurance Bulletin, 2018
Glossary of Terms/Ratios (February 2016)
LUR reports, 2007- 2018
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, Sovereign Trust Insurance Plc., and therefore, GCR has been compensated for the provision of the rating.
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 above was disclosed to Sovereign Trust Insurance Plc.
The information received from Sovereign Trust Insurance Plc. and other reliable third parties to accord the credit rating included:
- Audited financial statements to 31 December 2018
- Four years of comparative audited numbers
- Management accounts to 31 December 2019
- Budgeted financial statements for 2019
- 2019 reinsurance cover notes
- Actuarial valuation to 31 December 2018
- Other related documents.