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GCR Affirms Nigeria Reinsurance Corporation’s Rating Of BBB+(NG); Outlook Stable.

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nigeria Reinsurance Corporation (“Nigeria Re” or “the reinsurer”) based on the following key factors:

Nigeria Re’s capital base remained sizeable at N19.6bn at FY17, supporting robust risk adjusted capitalisation. In this regard, the reinsurer evidenced significant capital buffers, further supported by very limited underwriting risk. As such, shareholders’ funds covered net earned premium by 20.6x at FY17, while an adjustment for low yielding investment property (comprising a substantial 80% of FY17 consolidated capital) reduces the metric to 5.6x. Going forward, risk adjusted capitalisation is likely to remain within a very strong range, given a fairly stable risk profile, although significant risks could arise over the medium term if the quality of capital is not addressed.

Despite a significant investment portfolio tilted towards property, liquidity metrics were maintained within a very strong range, supported by low exposure to underwriting risk. In this respect, cash covered net technical provisions by 3.6x at FY17, while the claims cash cover ratio equated to 41 months (FY16: 3.7x and 61 months respectively). Liquidity metrics may remain at similar levels over the rating horizon, underpinned by management’s commitment to place operating cash flows into liquid assets, coupled with limited technical reserves. However, headroom within the very strong range is likely to moderate over the medium term on the back of persistent efforts to substantially expand the risk base.

Earnings capacity measured at a moderately weak level, with healthy investment income offset by limited underwriting performance.  In this respect, the investment yield equated to 3.2%, while an underwriting margin of -30.2% was recorded during the review year, with low earnings support provided by the life business. Notably, the reinsurer’s high operating expense ratio (review period average: 48%), coupled with a high and variable loss ratio represents a major constraint to an improvement in earnings capacity. In the absence of corrective action, these factors may continue to impact earnings over the medium term.

Competitive positioning remained very limited. Although gross premiums grew by a robust 60% in FY17, buttressed by life premiums, the reinsurer’s market share remained low at 4.7%. GCR perceives potential for rapid premium growth over the medium term, supported by an accommodative capital base and the ongoing brand awareness campaigns.

The reinsurer’s earnings profile is regarded to be sound, with four significant lines of business collectively accounting for 92% (FY16: 90%) of gross premiums. In line with norms, high value fire and accident risks, together with group life, dominate premiums, underpinning a moderately high aggregate product risk. Product risk is exacerbated by the reinsurer’s high risk retention on high value risks at a maximum deductible of 26% of net earned premiums, with the rest of the short term and the entire long term book written for the net account, albeit noting the intermediate aggregated level of credit strength exhibited by the retrocession panel.

Given that the majority of the reinsurer’s assets are domiciled in Nigeria, and the bulk of the revenue is derived locally, the international scale rating is constrained by Nigeria’s sovereign rating.

The rating may be adjusted upwards following a track record of profitable growth and an improved market share over the medium term. This would need to be supported by risk adjusted capitalisation and liquidity metrics remaining at strong levels. However, negative rating action may arise should the reinsurer record a sustained weakening in earnings capacity, material reduction in capitalisation and/or deterioration in the liquidity profile.

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