Announcements Financial Institutions Rating Alerts

GCR upgrades NEM Insurance Plc’s financial strength rating to AA-(NG) on sustained earnings strength; Outlook Stable

Lagos, 30 August 2021 – GCR Ratings (“GCR”) has upgraded NEM Insurance Plc’s national scale financial strength (formerly claims paying ability) rating to AA-(NG) from A(NG), with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
NEM Insurance Plc Financial strength National AA-(NG) Stable Outlook

Rating Rationale

The rating upgrade is largely underpinned by NEM Insurance Plc’s (“NEM” or “the insurer”) sustained strong through-the-cycle earnings, which consistently trended well above the market average. While the earnings trend registered a level of volatility over the review period, which somewhat restrained the rating in the past, recent reversion to strong underwriting margins despite macroeconomic challenges posed by the COVID-19 pandemic, as well as positive operational changes, have materially strengthened the insurer’s credit profile. Capitalisation remained robust despite pressures from gross premium growth. As such, NEM’s competitive position is considered sound, with the business profile assessment further enhanced by a well-diversified premium base.

NEM consistently evidenced sound earnings capacity over the review period, with the five-year underwriting margin registered at 14.1% (FY20: 17.4%; FY19: 6.6%), broadly comparing favourably with peers. The insurer’s underwriting margin rebounded to above 10% in FY20 driven by better control of the operating expense ratio, which reduced to a more competitive 36.5% (FY19: 48.1%; FY18: 43.7%). Despite a spike in the net incurred loss ratio to 38.2% (FY19: 31.2%) due to macroeconomic headwinds posed by COVID-19 pandemic and the fallout from the nationwide end-SARS protest, which culminated in wanton destruction of properties in FY20, the metric remained well contained at below 40%. In this respect, we believe that the cementing of the operating expense ratio within a 30% to 40% range, while maintaining a low claim book, will support underwriting margins above 10% over the outlook period, contrasting negative average industry underwriting margins. If this is supported by consistent investment income flows and return on revenue above 20%, there is possibility for the factor assessment to improve over the medium term.

On the strength of healthy earnings generation, NEM’s risk adjusted capitalisation is assessed within a sound range. In this respect, the insurer’s capital base grew by 30.4% to N18.4bn at FY20, while aggregate risk exposures increased concomitantly with business growth, with the GCR capital adequacy ratio (“CAR”) and international solvency margin registering at 2.4x and 113.2% respectively at FY20 (FY19: 2.3x and 107.4% respectively). From a statutory solvency perspective, the insurer’s solvency margin improved to 4.1x at FY20 (FY19: 2.9x), against the regulatory minimum of 1x. GCR also takes cognisance of the insurer’s good capital allocation, with investment property constituting a relatively moderate 8.8% of total capital at FY20 (FY19: 11.3%). Going forward, sound earnings generation and retention could continue to underpin internal capital build, with the GCR CAR expected to be maintained above 2x over the rating horizon.

Liquidity is assessed at an intermediate level, with cash and equivalents constituting a relatively lower 49.8% of investment funds at FY20 (FY19: 67.3%) following the insurer’s increased appetite for fixed income securities. This, coupled with the elevated claims incurred in FY20, saw cash coverage of average monthly claims moderate for the third consecutive year to 19.8 months (FY19: 30.5 months), while operational cash coverage registered at 13.4 months at FY20 (FY19: 11.2 months).

NEM is a top-tier player within the Nigerian Insurance landscape, with competitive position predominantly supported by its sound brand strength, well-entrenched relationships with brokers, and sustained penetration into the retail segment. In this regard, the insurer controls estimated market and relative market shares of about 7% and 3x respectively at FY20 in the non-life business arena. The premium mix is considered well diversified, with five of six business lines contributing over 10% to the premium base at FY20, albeit offset by single market concentration.

Outlook Statement

The Stable Outlook reflects our expectation that NEM will continue to defend its market position despite the increasing competitive dynamics. In this respect, GCR anticipates no material changes in the insurer’s business profile. We also expect NEM’s earnings capacity to remain robust, continuously supporting internal capital generation, with GCR CAR anticipated to remain above 2x over the rating horizon.

Rating Triggers

Upward rating movement could stem from sustained strong earnings generation positively impacting capitalisation and liquidity metrics over the medium term. Conversely, consistent liquidity pressures could trigger negative rating action.

Analytical Contacts

Primary analyst Yinka Adeoti Analyst: Insurance Ratings
Lagos, NG Adeoti@GCRratings.com +234 1 904 9462
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scale, Symbols & Definitions, May 2019
GCR Country Risk Scores, August 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings History

NEM Insurance Plc

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(NG) Stable Outlook August 2009
Last National A(NG) Stable Outlook July 2020

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 7.00
Country risk score 3.75
Sector risk score 3.25
Business profile 0.50
Competitive position 0.75
Premium diversification (0.25)
Management and governance 0.00
Financial profile 1.75
Earnings 0.75
Capital 1.50
Liquidity -0.50
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 9.25

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Retention The net amount of risk the ceding company keeps for its own account.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Statutory Required by or having to do with law or statute.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks do not qualify.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from NEM Insurance Plc and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2020;
  • Four years of comparative audited financial statements;
  • Management account as at 30 June 2021;
  • Reinsurance cover notes 2021 and
  • Other relevant documents.
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