GCR Affirms Sovereign Trust Insurance Financial Strength Rating

GCR Affirms Sovereign Trust Insurance Financial Strength Rating

GCR Ratings has affirmed Sovereign Trust Insurance Plc.’s national scale financial strength rating of A (NG), with a stable outlook, saying the rating reflects the insurance company’s good financial profile.

According to the rating note, Sovereign Trust’s financial strength is underpinned by high levels of risk-adjusted capitalisation, robust liquidity, and a sustained earnings base.

These factors are counterbalanced by the Insurer’s limited competitive position and gross premium concentration in the oil and gas product class, according to GCR Ratings. The mid-tier general insurer in the Nigerian Insurance sector is estimated to hold a 2.1% market share as of December 2021.

GCR stated that its long track record of leveraging technology for product innovation and growth which has deepened its retail penetration over time further supports the Insurer’s competitiveness.

The rating note indicates that the company’s concentration is noted in the premium base, with the oil and gas business line accounting for about 35% of gross written premium in 2021 versus 36% in 2021. Over the outlook horizon, GCR said it expects the business mix to be maintained. It said the insurer’s earnings are measured at a similar level as the prior year, albeit with a slight improvement in 2021.

The driver was mainly the turnaround in claims experience which supported an improvement in the combined ratio to 91.8% from 95.3% in the prior year while underwriting profit increased by about 90% to N539 million from N309 million in 2020.

Standard Trust’s realised investment income was volatile during the year because of lower yields on the investment portfolio, foreign exchange losses, and a spike in interest expense on borrowings, GCR said.

The total yield of the investment portfolio registered a significant decline to 5.4% last year from 10.6% in the financial year 2020.  Meanwhile, the rating note stated that the Insurer’s return on revenue moderately increased to 13% from 10.8% in 2020.

“We expect the insurer’s combined ratio to remain between 91%-95% over the next 12-18 months, supported by good underwriting and scale efficiencies, coupled with an improved investment result from higher yields on the investment portfolio”.

GCR noted that Sovereign Trust Insurance’s capital base grew by 11% to N9.6 billion in 2021, from N8.6 billion in 2020. The surge was supported by sound net profitability and fair value gains.

Last year, the rating note shows that the company’s statutory solvency margin closed higher at 2.7x at compared to the prior year’s 2.4x and the regulatory minimum of 1x.

“Going forward, we expect capital adequacy ratio (CAR) to be sustained around 3x, underpinned by good internal generation and possible capital injection of about N1.4 billion. READ: Leadway Assurance Sees Rating Upgrade on Better Financial Strength

“GCR also expects that the repayment of the insurer’s foreign currency debt will reduce exposure to currency volatility in the medium term, which could improve the capitalisation assessment going forward”.

GCR’s liquidity coverage registered at around 2.3x in the year under review from 2.2x in 2020, supported by steadily growing liquid assets, with 74% of total investments placed in cash and short-term placements.

Also supporting the Insurer’s liquidity assessment is a good asset and liability management framework. In the rating note, GCR said it expects liquidity coverage to be maintained at a similar level over the next 12-18 months.

However, the rating firm said the insurer remains vulnerable to the devaluation of the Naira and the potential impact on outstanding foreign currency debt balances, given the staggering obligation settlement and unhedged nature of the debt.

“The stable outlook reflects our expectation that the financial profile will be sustained by earnings and cash flow which feeds into strong capital and liquidity assessment.

“The planned settlement of the outstanding loan obligations should also contribute to improved sustainability of the insurer’s credit strength”, GCR Rating stated. #GCR Affirms Sovereign Trust Insurance Financial Strength Rating

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