LONDON--()--A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of B (Fair) and issuer credit rating of “bb” of Custodian and Allied Insurance Plc (Custodian) (Nigeria). The outlook for both ratings remains stable.
“Risk Management and the Rating Process for Insurance Companies”
The ratings of Custodian reflect its good risk-adjusted capitalisation, solid business profile as a commercial risk insurer based in Nigeria and its good operating performance. Offsetting rating factors are the company’s weak enterprise risk management (ERM), the uncertainty associated with its reserving strategy and rapid growth plans. The ratings of Custodian also incorporate a view of its exposure to the very high political and financial system risks associated with its operation in Nigeria.
Custodian’s risk-adjusted capitalisation is expected to slightly decrease going forward but still remain supportive of its ratings. The shareholders’ funds have grown considerably in the last five years partly through raises, following increases in minimum regulatory requirements. During 2010 and 2011, the growth of the shareholders’ funds has declined, but during 2012, the company received a convertible loan of USD 12.5 million from the International Financial Corporation (a member of World Bank Group) in order to support Custodian’s business growth plans.
Custodian maintains a solid business profile in the commercial segment of the Nigerian insurance market. During recent years, the company business registered a continued growth; although in 2011 the gross written premiums decreased by 26.7% to NGN 10 billion (USD 62 million). This was mainly related to a loss of a large oil and gas contract that was written as a one-off. However, without considering this large account, Custodian’s business volume increased by 50%.
Custodian’s technical account result in 2011 decreased by 64% to NGN 932 million (USD 5.8 million) (2010: NGN 2.6 billion [USD 16 million]) largely due to a decrease in revenue relating to the loss of the large contract, but the overall return on capital and surplus (16%) remained in line with the industry. A.M. Best remains cautious of Custodian’s growth plans, particularly in relation to the oil and gas business segment.
An offsetting rating factor in A.M. Best’s rating assessment is Custodian’s ERM framework, which A.M. Best considers to be weak. Although controls and guidelines are in place, the company lacks an adequate risk-based approach to capital management. Additionally, A.M. Best remains cautious of Custodian’s adequacy of reserves, although a statistical approach has been implemented in 2012.
Negative rating actions could occur if Custodian should experience a deterioration in its operating performance or significant erosion in its risk-adjusted capitalisation. Negative rating actions could also be taken if A.M. Best’s concerns related to the company’s reserving methodology, prospective business plan and ERM still remain going forward. Upward rating movements are unlikely in the next 12-24 months.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilised include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding Universal BCAR”; “Catastrophe Analysis in A.M. Best Ratings”; “Evaluating Country Risk”; “Rating Members of Insurance Groups”; “Equity Credit for Hybrid Securities”; and “Evaluating Country Risk.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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