GCR Affirms Sovereign Trust Insurance Plc’s rating of A-(NG); outlook Stable

08 Feb 2017 In Rating Notifications

GCR Affirms Sovereign Trust Insurance Plc’s rating of A-(NG); outlook Stable

Lagos Nigeria, 08 February 2017 — Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to Sovereign Trust Insurance Plc of A-(NG), with the outlook accorded as Stable. The rating is valid until October 2017.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Sovereign Trust Insurance Plc (“STI” or “the insurer”) based on the following key criteria:

STI’s risk adjusted capitalisation continued to improve to strong levels, underpinned by sound capital growth catering for the quantum of insurance and market risk exposures. Capital growth was largely supported by sound internal capital generation, coupled with a rights issue of N710m in FY15. As such, the capital base amounted to a higher N5bn at FYE15 (FYE14: N4bn). In this respect, shareholders’ funds to net earned premiums equated to a review period high of 128% at FYE15 (FYE14: 90%). Sound internal capital generation is likely to support risk adjusted capital adequacy at strong levels over the rating horizon.

Liquidity metrics measured at strong levels, with cash coverage of both technical provisions and claims equating to strong 1x and 25 months (FYE14: 0.8x, 14 months) respectively. GCR expects liquidity metrics to remain at a reasonably strong level, underpinned by sound operating cash flow generation and supported by the insurer’s conservative investment strategy.

Earnings capacity is largely a function of sound underwriting profitability and investment income. In this respect, the insurer’s five year aggregated underwriting margin equated to 8% (FY15: 6%; FY14: 5%), albeit evidencing a certain degree of variability. In GCR’s view, the underwriting margin is likely to remain within a sound range over the rating horizon, albeit remaining susceptible to volatility associated with the insurer’s core line of business.

STI’s business profile is considered to be intermediate, which is supported by a moderately strong competitive position. This is partially offset by a fairly concentrated earnings profile. The insurer is among top tier players in the Nigerian short term insurance arena, supported by strong brand recognition and an extensive broker network. However, the earnings stream is reliant on energy business, which introduces a certain degree of product risk (given moderately elevated year on year variability associated with energy business). As such, management expects to focus on increased diversification, while gradually strengthening competitive positioning.

STI’s reinsurance programme is led by African Reinsurance Corporation, with counterparties displaying moderate protection on ceded premiums. As a proportion of FY15 capital and NEP, the maximum deductible (pertaining to energy business) equates to 6% and 8% respectively. This is considered to be at a moderate level. The highest non-energy deductible corresponds to a more conservative 6% of capital.

Upward rating movement is likely to stem from underwriting profitability registering within a strong range, coupled with risk adjusted capital adequacy and liquidity remaining at strong levels. Furthermore, an improvement in the business profile (by way of increased market share or earnings diversification) may lead to positive rating movement. However, the rating would be sensitive to substantial weakening in capitalisation and/or liquidity metrics, as well as sustained deterioration in operating performance.

NATIONAL SCALE RATINGS HISTORY

Initial rating (November 2007)
Claims paying ability: A-(NG)
Rating outlook:  Stable

Last rating (December 2015)
Claims paying ability: A-(NG)
Rating outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Femi Atere
Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies (updated July 2016)
Sovereign Trust Insurance Plc, rating reports 2007-2015
Nigeria Short Term Insurance Industry Bulletin, 2007-2016
Glossary of Terms/Ratios, February 2016

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT WWW.GLOBALRATINGS.COM.NG

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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

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. with no contestation of/changes to the rating.

The information received from Sovereign Trust Insurance Plc. and other reliable third parties to accord the credit rating included:
• Audited financial results to 31 December 2015, plus four years of comparative audited numbers;
• Unaudited interim results to 30 September 2016;
• Budgeted financial statements for 2016;
• 2016 reinsurance cover notes;
• Actuarial valuation to 31 December 2015, and other related documents.

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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