GCR Upgrades NEM Insurance on Sustained Earnings Strength
An emerging market-focused rating agency, GCR, upgrades NEM Insurance financial strength rating to AA-, citing sustained earnings strength amidst the industry’s recapitalisation program currently put on hold by National Insurance Commission as operators take the regulator to court.
GCR Ratings said the stable outlook reflects an expectation that NEM will continue to defend its market position despite the increasing competitive dynamics, anticipates no material changes in the insurer’s business profile.
“We also expect NEM’s earnings capacity to remain robust, continuously supporting internal capital generation, with GCR CAR anticipated to remain above 2x over the rating horizon”, it added.
NEM is well on the way to meeting recapitalisation requirements but the pandemic, EndSARS issue with the Nigerian government disrupt the operating environment last year. The first phase of the recapitalisation exercise required that operators met a minimum of 50 per cent of the new requirement by December 2020 and the balance to be met in September 2021.
The exercise came to an abrupt halt following a Dec. 21, 2020, restraining order of a Federal High Court in Lagos. The court action was filed by a group of shareholders to restrain the NAICOM from continuing with the recapitalisation exercise.
In its new report, GCR said the rating upgrade is largely underpinned by NEM Insurance Plc.’s sustained strong through-the-cycle earnings, which consistently trended well above the market average.
“While the earnings trend registered a level of volatility over the review period, which somewhat restrained the rating in the past, recent reversion to strong underwriting margins despite macroeconomic challenges posed by the COVID-19 pandemic, as well as positive operational changes, have materially strengthened the insurer’s credit profile”.
Capitalisation remained robust despite pressures from gross premium growth, the ratings firm noted, adding that NEM’s competitive position is considered sound, with the business profile assessment further enhanced by a well-diversified premium base.
It said NEM consistently evidenced sound earnings capacity over the review period, with the five-year underwriting margin registered at 14.1%, and 17.4% last year and it was 6.6% in 2019, broadly comparing favourably with peers.
The insurer’s underwriting margin rebounded to above 10% in the financial year 2020 driven by better control of the operating expense ratio, which reduced to a more competitive 36.5% as against 48.1% in 2019 and 43.7% in 2018.
Despite a spike in the net incurred loss ratio to 38.2% from 31.2% in 2019 due to macroeconomic headwinds posed by the COVID-19 pandemic and the fallout from the nationwide end-SARS protest, which culminated in wanton destruction of properties in 2020, the metric remained well contained at below 40%.
“In this respect, we believe that the cementing of the operating expense ratio within a 30% to 40% range, while maintaining a low claim book, will support underwriting margins above 10% over the outlook period, contrasting negative average industry underwriting margins.
“If this is supported by consistent investment income flows and return on revenue above 20%, there is a possibility for the factor assessment to improve over the medium term”, GCR noted.
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On the strength of healthy earnings generation, NEM’s risk-adjusted capitalisation is assessed within a sound range.
It added that the insurer’s capital base grew by 30.4% to N18.4 billion in 2020, while aggregate risk exposures increased concomitantly with business growth, with the GCR capital adequacy ratio and international solvency margin registering at 2.4x and 113.2% respectively in 2020.
In 2019, these numbers printed at 2.3x and 107.4% respectively.
From a statutory solvency perspective, the insurer’s solvency margin improved to 4.1x in the financial year 2020 from 2.9x, against the regulatory minimum of 1x.
GCR also takes cognisance of the insurer’s good capital allocation, with investment property constituting a relatively moderate 8.8% of total capital in 2020 as against 11.3% a year earlier.
Going forward, the ratings said sound earnings generation and retention could continue to underpin internal capital build, with the GCR CAR expected to be maintained above 2x over the rating horizon.
The insurance company’s liquidity is assessed at an intermediate level, with cash and equivalents constituting a relatively lower 49.8% of investment funds in 2020 from 67.3% in 2019 following the insurer’s increased appetite for fixed income securities.
This, coupled with the elevated claims incurred in 2020, saw cash coverage of average monthly claims moderate for the third consecutive year to 19.8 months, while operational cash coverage registered at 13.4 months in 2020.
NEM is a top-tier player within the Nigerian Insurance landscape, with a competitive position predominantly supported by its sound brand strength, well-entrenched relationships with brokers, and sustained penetration into the retail segment.
In this regard, the insurer controls estimated market and relative market shares of about 7% and 3x respectively at 2020 in the non-life business arena.
The premium mix is considered well-diversified, with five of six business lines contributing over 10% to the premium base in 2020, albeit offset by single market concentration.
GCR Upgrades NEM Insurance on Sustained Earnings Strength
