GCR Affirms Sovereign Trust Insurance Financial Strength Rating, Revised Outlook

GCR Ratings has affirmed Sovereign Trust Insurance Plc’s national scale financial strength rating of A(NG); with the outlook revised to positive from stable- reflecting expectations of sustained levels in the insurer’s capitalisation and liquidity assessment over the next 12-18 months.

In the rating note, GCR said the financial strength rating balances STI’s moderate earnings, strong capitalisation and liquidity metrics against an intermediate competitive position and a concentrated policyholder base.

STI, a non-life insurer has a track record of over three decades in the Nigerian insurance market and gross written premiums (GWP) of N15.2 billion or USD 33.9 million, reflecting a three-year CAGR of 11.8% as at 31 December 2022.

The rating note reads that a considerable 49.2% of GWP was generated through direct sales, which GCR analysts consider positive in a broker-dominated market.

“While gross premiums were concentrated in the oil and gas business line which contributed 45.5% to GWP in 2022, concentration was less on a net written premium (NWP) basis, with the fire business line as the largest contributor to NWP at 21.5%”, said GCR in the rating note.

However, the firm noted that the insurer’s competitive position is constrained by its modest 3.7% market share of the industry’s non-life premiums as of 31 December 2022 and an increased policyholder concentration risk- the single largest policyholder in the oil and gas business accounted for 15.1% of GWP in 2022.

The insurance company’s earnings profile is assessed at an intermediate level, according to the rating note.

In 2022, its 19.7% growth in GWP was largely driven by the addition of a single name in the oil and gas segment which GCR analysts said they consider volatile.

The rating note said during the year under review, the insurer’s claims experience moderated compared to the previous year from the non-recurrence of “End SARS” linked claims.

As such, net claims declined by 25.1% and the claims ratio moderated to 34.2% compared to 43.6% in 2021. Coupled with a relatively well-contained operating cost structure, STI’s combined ratio improved slightly to 90.4% in 2022.

Underwriting profits grew by 12.8% to NGN669.9 million or USD1.5 million and translated to an underwriting profit margin of 9.6%, an improvement from 8.2% reported in 2021.

Detail from the rating note showed that STI’s investment income moderated by 5.2% in 2022 due to lower interest income on short-term placements, resulting in a lower investment yield of 4.8% in 2022 compared to peers. In 2021 investment yield was 5.4%

GCR wrote that STI profits remained pressured by an outstanding foreign currency loan of NGN2 billion or USD4.5 million as at end-2022 on which interest payments increased by 22% year on year due to the devaluation of the naira.

Overall, net profit after tax dropped to NGN838.8 million from NGN974.7 million in 2021 and translated to a return and revenue and return on assets of 11.6% and 4.8% respectively.

“Our assessment of the insurer’s risk-adjusted capitalisation is strong, supported by a sizable capital base relative to assumed risk exposures”.

Shareholders’ funds grew by 8.6% to NGN10.4 billion or USD 23.1 million as of 31 December 2022, surpassing the regulatory requirement of NGN3.0 billion for non-life insurers in Nigeria.

This growth was backed by earnings accretion, strengthening the GCR capital adequacy ratio to 3.2x in 2022 versus 3.0x in 2021.

GCR said additionally, STI’s statutory solvency margin was robust at 2.9x above the regulatory minimum of 1x versus 2.7x in 2021.

This level of risk-adjusted capitalisation is expected to remain, following the successful completion of a capital injection of NGN1.4 billion through a rights issue in September 2023, supported by good earnings generation and retention, GCR said.

However, the rating firm noted that STI’s foreign currency liability (until repaid) may remain a drag on capital, especially with the weakening of the local currency.

In 2022, the insurance company’s liquidity ratio of 1.8x, reflected a strong liquid investment portfolio with 74.3% (2021: 73.9%) held in cash and short-term placements. Nigeria Eurobond Slumps after CBN Resumes OMO Auction

“When we stressed the ratio assuming a full repayment of the debt obligation as of 2022, it remained above 1.5x. Notwithstanding, the insurer’s liquidity assessment remains susceptible to a probable further weakening of the naira given that the foreign currency debt obligation is unhedged”, GCR Ratings said in its update on the insurance company.