GCR Accords Financial Strength BB+(NG) Rating to Niger Insurance
By Modupe Gbadeyanka
Global Credit Ratings has accorded a financial strength rating to Niger Insurance Plc at BB+(NG), with the rating outlook accorded as Stable. The rating is valid until May 2018.
A statement by the rating firm explained that Niger Insurance is a known brand in the Nigerian Insurance industry with long track record spanning over five decades.
It said the firm is a mid-sized player based on its estimated consolidated market share of 3%, measured by industry gross written premiums (GWP) in FY15.
However, a substantial reduction in long term premiums in FY16 (N3.9bn, FY15: N7.9bn) saw the market share declining to a review period low; thus, impacting on the insurer’s competitive position. Going forward, management intends to regain market share over the short to medium term, through relationship maintenance and business diversification.
Niger Insurance’s consolidated cash and equivalents declined to an all-time low of N225m in FY16 (FY15: N845m, FY14: N1.6bn), due to reduced operational inflows.
This is considered to be a very low level of liquidity and a key rating consideration. Cash coverage of average monthly claims and technical liabilities of the short term business stood at 4 months and 0.1x in FY16 (FY15: 10 months and 0.3x, peer average: 28 months and 0.7x) respectively.
Furthermore, updated performance as at 1Q FY17 reflects a further decline in liquidity profile, thus constituting a major constrain to the rating.
Asset liability matching reflects a significant mismatch, given the elevated exposure to long term financial assets. In this respect, investment property measured at a very high 149% of capital at FY16 (FY15: 161%; FY14: 183%), representing a material risk and a key rating consideration. Although, management has indicated plans to diversify and balance its portfolio with increased weighting towards more liquid assets.
The insurer’s capitalisation position is considered moderate, given a healthy ratio of shareholders’ funds to net premium earned (NPE) equated to 168% at FY15 (peer group average: 213%) and 196% at FY16 (unaudited results). The statutory solvency coverage was recorded at 2.0x and 1.4x for the long and short term businesses respectively. Furthermore, shareholders’ funds to policyholders’ liabilities stood at 0.7x coverage at FY16 (FY15: 0.6x).
Management has informed GCR of its plan to seek equity investment from foreign investors. While this is expected to be realised over the short to medium term, it is still very much at a preliminary stage.
Earnings capacity is limited, underpinned by weak and volatile operating profitability. In this respect, the five year aggregate operating margin equated to 11% (FY16: 30%; FY15: 8%). Excluding unrealised income, the five year aggregate operating margin equates to a lower 4% (FY15: 2%).
In GCR’s opinion, earnings capacity is likely to remain limited over the rating horizon, with persistent variability.
The reinsurance counterparties are mid rated entities. The maximum deductible per risk and event amounts to USD1m (which equates to 8% of capital at FY16 average exchange rate).
While the rating may be reviewed upward following a significant improvement in liquidity metrics.
This would need to be supported by risk adjusted capitalisation registering at sound levels and/ or strengthening in earnings capacity.
However, the rating may be adjusted downward should liquidity remain at extremely low levels.
Furthermore, a decline in earnings capacity and /or a reduction in capitalisation may lead to downward rating action.