AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bb” (Fair) from “bb+” (Fair) and affirmed the Financial Strength Rating (FSR) of B (Fair) of Custodian and Allied Insurance Limited (CAIL) (Nigeria). Concurrently, AM Best has revised the outlooks to negative from stable for these Credit Ratings (ratings).
The ratings reflect CAIL’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, limited business profile and marginal enterprise risk management.
The downgrading of CAIL's Long-Term ICR reflects ratings drag from its parent company, Custodian Investment Plc (CIP), which AM Best considers to be of lower credit quality. CIP has considerable exposure to long-dated Nigerian government debt, the credit quality of which has deteriorated, and its balance sheet strength has been impacted accordingly.
The revision of the outlooks to negative reflects deteriorating fiscal conditions in Nigeria, and the potential consequences that they may have on the balance sheet strength of CAIL and its parent.
CAIL’s balance sheet strength is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), and capital consumption is predominantly driven by the asset risk associated with its exposure to domestic assets. With heightening economic, political and financial systems risks in Nigeria, there is the potential for the risk-adjusted capitalisation of CAIL and CIP to deteriorate materially. CAIL’s balance sheet strength assessment also considers its high reinsurance dependence, driven by large cessions on energy and property risks.
CAIL is expected to report a five-year (2018-2022) weighted average combined ratio of approximately 92%, with the company’s combined ratio expected to deteriorate to marginally below 100% in 2022. Although high inflation and volatility in foreign exchange (FX) rates are expected to pressure prospective underwriting performance, the company is accustomed to operating in turbulent macroeconomic conditions and results are expected to improve in the short term. The company holds surplus assets in U.S. dollar-denominated investments, which are expected to offset the impact of any FX volatility on underwriting results. CAIL’s overall performance is skewed toward investment income due to its relatively low underwriting leverage and the high interest rate environment in Nigeria, with underwriting income accounting for approximately 15% of pre-tax profits in recent years.
CAIL is among the leading non-life insurers in Nigeria and writes a well-diversified book of business on a net basis. However, the company is geographically concentrated in Nigeria, which is subject to considerable political, economic and financial system risks, making it a challenging operating environment.
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