Lagos Nigeria, 03 October 2018 — Global Credit Ratings has affirmed the nation scale claims paying ability rating of AA-(NG) assigned to Leadway Assurance Company Limited, with the outlook accorded as Stable. The rating is valid until September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Leadway Assurance Company Limited (“Leadway” or “the Insurer”) based on the following key criteria:
The insurer reflects a solid capital base of N47bn (FY16: N31.5bn), with the ratio of shareholders’ funds to net earned premium equating to 67% at FY17 (FY16: 76%). As such, risk adjusted capitalisation is considered to be strong, catering sufficiently for insurance and market risk exposures. The insurer is expected to reflect similar solvency metrics by end-FY18. Note is, however, taken of considerable exposure to foreign currency fluctuations, which could impact internal capital generation over the rating horizon.
Supported by sizeable gross premium scale, the business profile is assessed within a sound range. This is a function of the insurer’s robust competitive position, which is offset by an intermediate earnings profile. Leadway enjoys a leading position in the Nigerian insurance industry, controlling about 16% of overall gross written premiums, approximating 5x the industry average in recent years. However, overall growth has historically been supported by annuities and lumpy energy business, with future premium development likely to moderate on the back of volatility in the core product portfolio. In order to stabilise the business profile over the medium term, the insurer is increasing focus on retail business, leveraging on its various digital channels, brand franchise and agent relationships to diversify the earnings base.
The investment portfolio continues to be conservatively managed, and is supportive of a high level of asset quality. This negated liquidity pressures, with review year overall cash (inclusive of interest securities) coverage of policyholder liabilities equating to 1.07x (1H FY18: 0.95x). Note is made of the reduction in corresponding short term business liquidity metrics (FY17: 0.7x; 1H F18: 0.6x) on account of an increase in reinsurance receivables. Thus, liquidity is viewed to be sensitive to working capital management over the rating horizon.
Leadway continued to maintain a strong asset/liability matching for the life business, with 82% of its investment portfolio held in near liquid instruments, and the maturity profile and yields of investment assets closely matching obligations on funding liabilities. This notwithstanding, shortfalls on the short term business investment portfolio relative to net technical liabilities reduce GCR’s assessment of the insurer’s asset/liability matching to a moderate level. In this regard, management’s ability to remedy liquidity trends on the non-life book represents a key rating input over the medium term.
Overall earnings volatility, coupled with persistent underwriting losses on the short term business, suppressed earnings capacity to a moderate level. Although the life business reported positive operating results over the review period and an elevated operating margin of 15% in FY17 (review period average: 9%), the variable earnings impact of predominant annuity premiums, compounded by volatile and unprofitable exposures on the non-life business (review period underwriting margin and loss ratio: -50% and 105%) significantly limit earnings generation. Going forward, earnings capacity could measure within a lower range, reflecting the combined impact of continued volatility in the earnings stream (particularly from the short term business), elevated short term business claims, and a possible reduction in scale efficiencies.
The strength of Leadway’s reinsurance counterparties is positively considered, with lead reinsurers on the programme reflecting strong to moderate ratings on an international scale. Reinsurance is adequately utilised, with overall retention and maximum net deductibles per risk and event measuring at a conservative level.
The volatile earnings profile limits the likelihood of an upgrade over the medium term. However, positive rating action could emanate from an enhanced business profile, coupled with improved earning persistency on both long and short term businesses. Conversely, a downward rating movement may result from a substantial and sustained weakening in risk adjustment capitalisation and/or liquidity metrics. Furthermore, a significant loss of market share would be negatively considered.
NATIONAL SCALE RATINGS HISTORY
Initial rating (July 2001)
Claims paying ability: A(NG)
Rating outlook: Stable
Last rating (August 2017)
Claims paying ability: AA-(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
Leadway rating reports 2001-17
Glossary of Terms/Ratios (February 2017)
RATING LIMITATIONS AND DISCLAIMERS
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 rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the rating expire in September 2019.
The rating was solicited by, or on behalf of, Leadway Assurance Company Limited, and therefore, GCR has been compensated for the provision of the ratings.
Leadway Assurance Company 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 has been disclosed to Leadway Assurance Company Limited.
The information received from Leadway Assurance Company Limited and other reliable third parties to accord the credit rating included:
• Audited financial results to 31 December 2017
• Four years of comparative audited numbers
• Unaudited interim results to 30 June 2018
• Budgeted financial statements for 2018
• Actuarial report to 31 December 2017
• The current year reinsurance cover notes, and
• Other related documents.
GCR Affirms Leadway Assurance Company Limited’s Rating of AA-(NG); Outlook Stable