GCR affirms Custodian Life Assurance Limited’s rating of A-(NG); Rating Watch.

11 May 2017 In Rating Notifications

GCR affirms Custodian Life Assurance Limited’s rating of A-(NG); Rating Watch.

Lagos Nigeria, 11 May 2017—Global Credit Ratings has affirmed the financial strength rating assigned to Custodian Life Assurance Limited at A-(NG), with the rating maintained on Watch. The rating is valid until September 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to Custodian Life Assurance Limited (“Custodian Life” or “the insurer”) based on the following key criteria:

Custodian Life was placed on Rating Watch due to a decline in the capital coverage to policyholders’ liabilities ratio at FY15. Although improved profitability in FY16 contributed to a 12% increase in shareholders’ funds (FY16: N4bn vs. FY15: N3.6bn), a marked 82% increase in policyholder liabilities to N15.5bn led to a further reduction of the capital coverage ratio (FY16: 0.3x; FY15: 0.4x; FY14: 1.1x). Solvency dilution is likely to persist over the rating horizon (in the absence of any capital injections), given continued business volume growth pressures.

The insurer reflects a sizeable investment portfolio, covering policyholder liabilities by 1.4x at FY16 (FY15: 1.6x). Note is taken of the portfolio rebalancing, with substantial increases placed in tradeable government securities (with maturities ranging from one year to over five years). As such, asset liability matching is viewed to be strong, given that the bulk of the portfolio is held in near liquid instruments. Furthermore, extracts from the actuarial valuation report reflected that the insurer has adequately matched liability exposures to comparable financial assets.

Custodian Life is a top-tier player in the long term insurance subsector, supported by strong brand acceptance as a member of Custodian and Allied Plc (one of the five largest insurance groups in Nigeria). The insurer recorded significant growth in gross written premiums in FY16 (61% against budgeted 27%), contributing towards an enhanced market profile. Growth was largely driven by a notable uptake in annuity products, with Custodian Life benefitting from the industry-wide annuity product push. In this respect, annuity business accounted for over 50% of gross premiums in FY16, representing a material departure from the lower risk offerings historically underwritten (predominantly group life and investment products).

The insurer reflected an improved operating result of N1bn in FY16, in-line with projections. This was driven by the significant increase in business volumes and investment income. Consequently, the operating margin improved to 7.6% in FY16, from 0.2% in FY15, albeit exhibiting a variable trend over the review period. The operating margin has been constrained by the increase in benefits paid (especially over the past two years), increased provisions on annuity business (as per regulatory requirements) and notably higher year on year operating expenses. Going forward, earnings capacity is expected to continue to exhibit a certain level of variability.

Conversely, upward movement in the rating may result from sustained improvement in operating performance combined with a strengthening in solvency, while maintaining liquidity at strong levels. A rating downgrade may follow should capitalisation metrics relative to policyholders’ liabilities decline further.

NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2015)
Claims paying ability: A-(NG)
Outlook: Stable

Last rating (October 2016)
Claims paying ability: A-(NG)
Rating watch: Yes

ANALYTICAL CONTACTS
Primary Analyst
Funmilayo Abdulrahman
.(JavaScript must be enabled to view this email address)
+234 1 462 2545


Committee Chairperson
Dave King
.(JavaScript must be enabled to view this email address)


APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated July 2016
Glossary of Terms/Ratios (February 2017)
Custodian Life rating reports, 2015-16


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT www.globalratings.com.ng

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The rating was solicited by, or on behalf of, Custodian Life Assurance Limited, and therefore, GCR has been compensated for the provision of the rating. Custodian Life Assurance Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating above was disclosed to Custodian Life with no contestation of the rating.

The information received from Custodian Life Assurance Limited and other reliable third parties to accord the credit ratings included:

• The 2016 audited financial results (plus four years audited comparative figures)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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