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

17 Apr 2018 In Rating Notifications

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

Lagos Nigeria, 16 April 2018 - 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 September 2018.

SUMMARY RATING RATIONALE

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

Sovereign Trust Insurance Plc (“STI” or “the insurer”) reflected strong capitalisation over the last two years and as at 3Q FY17, with shareholders’ funds amounting to N5.8bn at 3Q FY17 (FY16: N5.2bn, FY15: N5bn). As such, risk adjusted capitalisation registered within a strong range, further supported by sustained reduction in net revenue. Accordingly, shareholders’ funds equated to 124% of net earned premium (“NEP”) at 3Q FY17 (FY16: 134%, FY15: 128%). Risk adjusted capitalisation is likely to remain within a strong range going forward, given relatively well contained insurance and market risk envisaged as well as a sound internal capital generation capacity.

Adjusted liquidity metrics (excluding borrowings) measured at a moderately strong level. In this regard, cash coverage of net technical liabilities equated to a stable 0.7x at 3Q FY17 (FY16: 0.8x), while claims cash coverage registered at a stable 19 months. Liquidity metrics are expected to remain within a moderately strong range over the rating horizon, supported by the sound cash flow generation and balanced asset allocation.

Earnings capacity moderated over the past two years, underpinned by subdued underwriting profitability, and impacted by foreign exchange losses on borrowings. As such, the two year underwriting margin equated to a lower 3% (FY16: 2%), compared to 17% in the prior three year cycle. Similarly, the two year average return on equity (“ROE”) equated to a lower 6%, compared to the prior three year average of 31%.

STI’s competitive positioning has been largely impacted by decline in premium base over the bulk of the review period, with gross premiums reporting a compounded annual growth rate (“CAGR”) of -5%.  This compares to peer’s CAGR of -1%. Accordingly, STI’s estimated share of total industry gross premiums registered at a lower 3.4% in FY16 (FY15: 3.8%). The insurer expects to increase its market share and competitive positioning, through its planned retail network expansion.

The insurer’s earnings are fairly well diversified, with four of the six lines of business contributing more than 10% to the gross premium in FY16. While cognisance is taken of the notable contribution from the energy business (FY16: 35%, FY15: 40%) over the years, management expects the revenue mix to reflect increased retail contribution going forward given the various retail initiatives put in place by the insurer.

  Reinsurance counterparties evidenced an intermediate aggregate level of counterparty strength. In addition, the maximum net deductible corresponds to a moderate 5.8% of capital.

An upward movement in the rating or outlook may follow a rise in market share, accompanied by a sustained improvement in profitability and liquidity metrics. While the rating would be sensitive to a sustained deterioration in key credit protection metrics and/or sustained weakness in operating performance.

NATIONAL SCALE RATINGS HISTORY

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

Last Rating (February 2017)
Claims paying ability: A-(NG)
Rating outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Adeyinka Olowofela
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 2017
Glossary of Terms/Ratios (February 2016)
STI rating reports, 2007- 2017
Nigeria Short Term Insurance Industry Bulletin, 2017

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S 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, GCR’S RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLI WEB SITE AT:  HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE ON 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 POINTS 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 2016
• Four years of comparative audited numbers
• Unaudited interim results to 30 September 2017
• Budgeted financial statements for 2017
• 2017 reinsurance cover notes
• Actuarial valuation to 31 December 2016
• 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/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.

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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