Johannesburg, 07 Mar 2014 — Global Credit Ratings has today downgraded the national scale claims paying ability rating of Standard Alliance Insurance Plc to BBB(NG); with the outlook accorded as Stable. The rating(s) are valid until 10/2014.
SAI 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 16% over the review period. However, the high average delivery cost ratio exceeds that of the peer group, and has given rise to underwriting volatility over the review period. While note is taken of the very low average loss ratio of 16% (budgeted to persist going forward), the insurer’s underwriting margin continues to be exposed to expense constraints. Furthermore, the insurer is viewed to reflect an aggressive risk appetite, exhibiting a significantly higher retention rate (91%) relative to the industry average (67%).
Liquidity risk is viewed as high, with cash coverage of net technical reserves weakening further to a very low 0.1x at FYE12. Cash coverage of average monthly claims also deteriorated to a review period low of 3 months, while coverage of average monthly underwriting outflows fell below 1 month. The remainder of the investment portfolio offers very limited liquidity relief, with the vast majority thereof tied up in illiquid assets. In addition, a very large portion of the insurer’s balance sheet is financed by a N1.1bn callable bond, issued to a single entity. Material liquidity strain may arise should the subscriber exercise the early redemption clause.
The insurer’s international solvency margin exceeds the peer group average, despite a sharp reduction in F12 due to adjustments pertaining to the transition to IFRS. Note is taken, however, of the large portion of the capital base underpinned by investments in associates, which limits capital flexibility, while giving rise to high potential downside exposure.
New regulatory guidelines on insurance premium collections and remittances prohibit underwriters from providing premium receivables and concomitant asset write-downs 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 a substantial strengthening in the insurer’s liquidity metrics, an improvement in underwriting performance regarding growth and scale efficiency, accompanied by risk appropriate solvency levels. Negative rating action may follow a deterioration in the insurer’s operating performance, as well as a further weakening in liquidity metrics and/or a decline in the solvency margin.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Mar/2013)
Claims paying ability: BBB+(NG)
Last rating (Mar/2013)
Claims paying ability: BBB+(NG)
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Short Term Insurance and Reinsurance Companies
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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.
Standard Alliance 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 Standard Alliance Insurance Plc with no contestation of the rating.
The information received from Standard Alliance 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 December 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.