GCR Affirms Custodian Life Assurance Limited's Rating; Outlook Stable

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Monday, May 31, 2021 / 08:07 AM / By GCR Ratings / Header Image Credit: Custodian Life Assurance Limited

 

Global Credit Ratings has affirmed the national scale financial strength rating assigned to Custodian Life Assurance Limited of A(NG), with the outlook accorded as Stable. The rating is valid until October 2021.


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 shareholders' funds remained strong at N10.5bn at 3Q FY20, representing a 10.3% rise over FY19 position. Reported growth was on the back of strong internal capital generation during the review year. This notwithstanding, coverage of policyholders' liabilities remained low at 0.2x (FY19: 0.2x), given the reported growth in liabilities during the corresponding period (annuity business in particular). Nevertheless, risk adjusted capitalisation is considered to be adequate, supported by a sizable capital base, along with modest exposure to market risks.


Liquidity is positively considered, given moderately strong liquidity metrics at 3Q FY20. In this respect, cash and equivalents covered net technical liabilities by 1x (FY19: 1.1x, FY18: 1x), while operational cash coverage registered at 114.2 months (FY19: 83.9 months, FY18: 63.3 months). Going forward, GCR expects liquidity metrics to be maintained within similar range, given the insurer's conservative asset allocation strategy. Similarly, asset/liability matching is considered to be fair, with about 88% of its investment portfolio held in interest bearing securities, potentially matching the behaviour of funding liabilities which are largely interest sensitive.


Earnings are a rating positive. The insurer has maintained stability in its earnings capacity, registering a review period operating margin of 7.5%. Earnings have been supported by growth in premium volumes, as well as enhanced investment income and more recently (FY19 and 3Q FY20) fair value gains. Going forward, investment income may be subdued, given the decline in interest rate yields.


Custodian Life continued to defend its position as a top tier player in the Nigerian life insurance subsector, controlling an estimated 12.3% market share. The insurer's position has been sustained over the years by strong brand acceptance (through group synergies), experienced personnel and established broker relationships. Going forward, GCR expects Custodian Life to maintain its strong market position, underpinned by an established brand and various initiatives put in place for further market penetration. While the annuity business constitutes bulk of the insurer's premium mix, concentration risk is considered minimal given the retail nature of the business, which comprises of about 10,000 policyholders at FY19.


An upward rating movement may result from a sustained improvement in operating performance combined with a strengthening in solvency metrics, while maintaining liquidity at strong levels. Similarly, a negative rating action may result from a persistent weakening in capitalisation metrics. Furthermore, material loss of market share and/or deterioration in earnings capacity may also give rise to negative rating pressure.


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