Lagos Nigeria, 15 March 2019 – Global Credit Ratings has upgraded the national scale financial strength rating assigned to Custodian Life Assurance Limited to A(NG) from A-(NG), with the outlook accorded as Stable. The rating is valid until October 2019.
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’s risk adjusted capitalisation is considered strong, supported by a sizable capital base, along with modest exposure to market risks. In this regard, the capital base equated to a higher N5.3bn at FY17 (FY16: N3.2bn), on the back of enhanced profit retention. Furthermore, the capital base increased to N8.1bn at end-October FY18, following a capital injection of N2bn by the parent company, Custodian Investment Plc (“the Group”). Resultantly, the capital adequacy ratio equated to 263% at FY17 (FY16: 202%), and is assumed to have improved further post capital injection. This notwithstanding, shareholders’ funds coverage of policyholders’ liabilities remained low at 0.2x as at October FY18 (FY 17: 0.3x, FY16: 0.4x), given elevated technical obligations necessitated by dominance of annuity business in the insurer’s business mix. Maintenance of a large capital base together with the pursuance of a conservative investment approach are likely to underpin an assessment of risk adjusted capitalisation within a strong range over the rating outlook.
Custodian Life continued to reflect a very strong liquidity profile, supported by a conservative investment mix. In this regard, cash and equivalents constituted a stable 79% of the total investment portfolio at FY17 (FY16: 80%). As such, claims cash coverage equated to a robust 60.6 months at FY17 (FY16: 49.6 months), while cash coverage of policyholders’ and investment liabilities stood at 1x (FY16: 1.1x). Going forward, liquidity metrics are expected to remain within a strong range, supported by sound cashflow generation and conservative asset allocation.
Custodian Life’s competitive position is considered strong, with the insurer ranked amongst the top tier players in the Nigerian life insurance industry. Notwithstanding a slight decline of 3.5% reported in gross premiums in FY17, cumulative premium volume expansion over the first four years of review period underpinned a strong competitive profile with the insurer’s market share closing at 19.9% in FY17. The insurer’s market position is supported by strong brand recognition (Custodian Group franchise) coupled with well-established relationships with intermediaries. Going forward, given several strategic initiatives put in place and management’s decision to have a fixed rate on annuity (which may result in further premium contraction), overall premium growth may taper over the medium term.
Following a three-year cycle characterised by earnings volatility, Custodian Life’s earnings capacity evidenced significant improvement and stability over the last two years of the review period. This was largely supported by the growth in premium volumes, along with enhanced investment income. Accordingly, the operating margin stabilised at 8.2% in FY17 (FY16: 7.6%, FY15: 0.2%; FY14: 32.1%), while ROaE averaged 23% between FY16 and FY17 (prior three-year average: 8%). Going forward, earnings stability is likely to be sustained, with profitability metrics expected to trend within similar ranges over the rating horizon.
An upward rating movement may result from sustained improvement in operating performance combined with a strengthening in solvency, while maintaining liquidity at strong levels. Negative rating action may result from sustained weakening in capitalisation metrics. A material loss of market share and/ or deterioration in earnings capacity, may also give rise to negative rating pressure.
NATIONAL SCALE RATINGS HISTORY
Initial rating: September 2015
Financial strength: A-(NG)
Rating outlook: Stable
Last rating: December 2017
Financial strength: A-(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurance Companies, updated May 2018
Custodian Life rating report, 2015 – 2017
Glossary of Terms/Ratios (February 2016)
RATING LIMITATIONS AND DISCLAIMERS
SALIENT POINTS 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; c.) such rating was 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 Assurance Limited with no contestation of/changes to the rating.
The information received from Custodian Life Assurance Limited and other reliable third parties to accord the credit rating included:
• The 2017 audited annual financial statements (plus four years audited comparative figures)
• The full year detailed budgeted financial statements to December 2018
• Unaudited financial statements to October 2018
• The reinsurance cover notes for 2018
• The actuarial valuation reports for FY17, and
• Other related documents.