A.M. Best Eliminates Ratings of Custodian and Allied Insurance from Under Review

A.M. Best Europe - Rating Services Limited has removed from under review with negative implications and affirmed the financial strength rating of B (Fair) and issuer credit rating of "bb" of Custodian and Allied Insurance Plc (Nigeria).

In a release on November 22, A.M. Best noted that the outlook assigned to both ratings is stable.

In April of this year, the ratings of Custodian were placed under review with negative implications following the announcement that the company had completed its acquisition of Crusader (Nigeria) Plc. Due to the absence of sufficient information to support A.M. Best's evaluation of the transaction at that time, A.M. Best considered there to be uncertainty with regards to its impact on Custodian's rating fundamentals.

The rating affirmations reflect A.M. Best's expectation that Custodian's risk-adjusted capitalisation will continue to remain supportive of its current rating level. Additionally, the company's competitive profile and operating performance are expected to remain solid. Negative rating factors are Custodian's underdeveloped risk management framework and reserving strategy.

Custodian's risk-adjusted capitalisation is expected to remain at a strong level, although some erosion is anticipated in 2013. This is due to growth in premium volumes arising from the full consolidation of Crusader's business into Custodian, relative to the diminished capital position of the new consolidated group. Under the terms of the deal, Crusader's shareholders were offered eight shares in Custodian for every 34 shares previously held, with the remaining share capital of Crusader cancelled. The acquisition of Crusader was largely funded through internal resources, in addition to a convertible loan of USD 12.5 million (approximately NGN 2 billion) issued by a development financial institution in 2012. Going forward, A.M. Best expects the company's risk-adjusted capitalisation to be supported by the robust earnings of the group.

Prospective operating performance is expected to remain solid. In 2012, Custodian and Crusader generated a return on equity of approximately 12 percent and 10 percent, respectively. However, both entities have demonstrated volatility in their underwriting results over the last five years.

Prior to the acquisition, Custodian maintained a good business profile primarily operating in the commercial segment of the Nigerian insurance market. The acquisition of Crusader has further strengthened Custodian's competitive position, through Crusader's established profile in the retail segment of the market. Custodian will also benefit from a life portfolio, which will represent around a third of gross premium volumes. A.M. Best will continue to monitor the integration of Crusader into the Custodian group.

Custodian continues to target growth within the oil and gas and retail segments of the market. Gross premium volumes are expected to increase annually by approximately 20 percent in the near term. Given the company's underdeveloped risk management framework and the uncertainty associated with its reserve adequacy, A.M. Best considers there to be material risk associated with its rapid growth plans.

There are currently no upwards rating pressures. Negative rating actions could occur due to deterioration in Custodian's operating performance or significant erosion in its risk-adjusted capitalisation. A decline in Nigeria's economic fundamentals could also negatively affect the company's ratings.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process.

A.M. Best Company is an insurance rating and information source.

More information:

www.ambest.com/ratings/methodology

www.ambest.com

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