A.M. Best has downgraded the Financial Strength Rating to C++ (Marginal) from B- (Fair) and the Long-Term Issuer Credit Ratings to “b+” from “bb-” of Wapic Insurance Plc, the operating holding company of the Wapic group of companies.
The outlook of these Credit Ratings (ratings) is stable.
The rating downgrades reflect the material decline in Wapic’s risk-adjusted capitalisation in 2015 and the expectation for this deterioration to continue over the medium term, largely due to the group’s increasing investment risk profile.
In 2015, Wapic increased its stake in a private financial institution part-owned by Wapic’s main shareholder.
This stake was raised further in the following year, so that it accounted for approximately a third of total investments as at September 2016.
Although appearing to exceed the group’s concentration limits, as set in the investment policy, the private investment was approved by the Board of Directors. Nonetheless, as a result of the above actions, A.M. Best has concerns regarding the strength of Wapic’s governance, risk management framework and capital management strategy.
Wapic’s risk-adjusted capitalisation is also likely to remain under pressure, due to the group’s aggressive growth strategy that targets a high double digit annual increase in premium volumes in the medium term.
Wapic reported a 10% rise in net written premium for the first nine months of 2016, significantly below the group’s plans, which was most likely a reflection of the difficulties within Nigeria’s economy.
The rating action also considers Wapic’s weak technical performance, which has declined materially in 2016, as demonstrated by the combined ratio of 157% reported for the first nine months of the year (first nine months of 2015: 110%).
A.M. Best expects prospective technical results to be significantly affected by the group’s substantial fixed costs, which are likely to keep rising as Wapic develops its operating infrastructure to support expansion.
Nonetheless, operating earnings in 2016 are anticipated to be profitable, primarily supported by foreign exchange gains associated with the weakening of the Naira relative to the U.S. dollar. Wapic maintains a large holding of U.S. dollar-denominated assets to hedge against the uncertainty surrounding the strength of the Naira.
The deteriorating economic conditions prevailing within Wapic’s target markets represent a material downside risk for the group as it executes its business plans.