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A.M. Best Europe – Rating Services Ltd. has revised the outlook to negative from stable and affirmed the financial strength rating of B- (Fair) and issuer credit rating of “bb-” of Leadway Assurance Company Limited (Leadway) (Nigeria).
The negative outlook on Leadway’s ratings reflects the ongoing uncertainty associated with the performance of its aggressive investment asset allocation with large equity and unquoted securities holdings; hence, the subsequent impact on its risk-adjusted capitalisation. The ratings also consider Leadway’s exposure to the high political, economic and financial system risks associated with its operation in Nigeria.
Leadway’s risk-adjusted capitalisation has weakened in 2011, due to the decline in equities revaluation reserves owing to substantial reductions in stock prices in the capital market. Going forward, A.M. Best believes that Leadway’s risk-adjusted capital position is likely to remain under pressure due to the volatile domestic capital markets and Leadway’s ambitious growth targets.
Leadway’s net income after taxes decreased by 25.6% to NGN 1 billion (USD 6.5 million) in 2011 due to a higher claims payout than the prior year, which was caused by large single losses. The life segment returned to profitability in 2011, posting a gain of NGN 147 million (USD 0.9 million). However, the company’s non-technical account continues to be negatively impacted by allowances that are created for doubtful quoted and unquoted investments as well as write offs and provisions for bad and doubtful accounts. In 2011, the proportion of equities in the investment portfolio declined to 30% (2010: 39%) and fixed-income holdings were actively increased to 6% (2010: 0.1%) of the total investment portfolio. While Leadway grows its annuity business it is thriving to back its life liabilities with government bonds. Despite the reduction of equities within Leadway’s portfolio, A.M. Best believes that investment performance is likely to remain subjected to significant volatility going forward, due to the company’s large equity holdings and approximately NGN 5.8 billion (USD 36.6 million) (2010: NGN 4.1 billion) of unquoted securities as at year-end 2011.
Leadway benefits from a good business profile within its local market as an established writer of non-life retail lines and larger commercial risks. Additionally, the company continues to grow its life insurance book. In 2011, the company’s total gross premiums increased by 44% to NGN 24 billion (USD 151 million), mainly driven by one large contract within the oil and gas industry. The life business grew by 75% to NGN 4.5 billion (USD 28 million) driven by a significant increase in Leadway’s annuity business, which the company had started writing in 2010. Prospectively, Leadway is likely to experience good premium growth in 2012, especially in the life segment.
Positive rating actions would occur if Leadway strengthens its risk-adjusted capitalisation and continues to decrease its large equity holdings and investments in unquoted securities.
Negative rating actions could occur if the company experiences further deterioration in its risk-adjusted capitalisation below a level considered supportive of the current ratings. Deterioration in operating performance also would be seen negatively.
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. Key criteria utilised include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding Universal BCAR”; “Rating Members of Insurance Groups”; and “Evaluating Country Risk”. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure.
A.M. Best Europe – Rating Services Limited is a subsidiary of A.M. Best Company. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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