A.M. Best has affirmed the Financial Strength Rating (FSR) of B (Fair) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “bb” of Custodian and Allied Insurance Limited (CAI) (Nigeria). The outlook of the FSR remains stable, whilst the outlook of the Long-Term ICR remains positive. CAI is the wholly owned non-life subsidiary of Custodian and Allied Plc.
The ratings reflect CAI’s balance sheet strength, which A.M. Best categorises as very strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management (ERM). The ratings also factor in the company’s exposure to high levels of economic risk, and very high levels of political and financial system risk associated with operating exclusively in Nigeria.
The positive outlook of the Long-Term ICR continues to reflect the steady improvements in CAI’s risk management framework, which assists in improving the stability of operating performance and balance sheet strength in a highly competitive operating environment.
A.M. Best expects CAI’s balance sheet strength to remain at the very strong level, underpinned by solid risk-adjusted capitalisation and a prudent dividend policy. Offsetting these rating factors is the quality of CAI’s assets, which are mainly restricted to Nigeria, its moderate dependence on reinsurance and the elevated risks associated with operating in Nigeria. The company has a return on equity in excess of 20% over the past five years demonstrating its resilient operating performance. Additionally, ongoing development of CAI’s risk management framework is expected to be a positive factor in sustaining the company’s balance sheet strength. In particular, the company’s internal risk-based capital model has started to support strategic decisions, such as reinsurance placements and capital management policy.
CAI’s operating performance has been volatile in recent years and is assessed as adequate. In 2016, the company benefited from significant foreign exchange gains in response to the devaluation of the Nigerian Naira against stronger foreign currencies including the US Dollar, Euro and Pound Sterling. As a result of the currency devaluation, CAI’s technical performance reduced substantially to NG82.1 million, although this was offset by the significant increase in foreign exchange gains, which boosted investment income, as the company held 75% of cash in foreign currencies. In line with company’s business plan, CAI’s third-quarter 2017 results show top-line growth of 29% and a reduction in the loss ratio to 33%.
While CAI has a leading market position within its domestic market, its profile is limited to Nigeria and thereby exposes the company to the economic and financial system risks of the local market. Although Nigeria’s difficult economic conditions represent a challenge for CAI, A.M. Best believes the associated risks may be mitigated partly by the company’s strong position in the market, growing retail business and improving ERM practices including the strategic decision of holding US Dollar assets outside of Nigeria.
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