Leadway Assurance rating drops to negative

Leadway Assurance rating drops to negative

A.M. Best Europe – Rating Services Limited world’s renowned rating agency has revised Leadway Assurance Company Limited outlook from stable to negative Inspen has learnt.

The agency revised the outlook from stable and affirmed the financial strength rating of B- (Fair) and issuer credit rating of “bb-”.

A.M. Best Europe said 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.

It noted that the ratings also consider Leadway’s exposure to the high political, economic and financial system risks associated with its operation in Nigeria.

The agency said 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, adding that going forward, it believes that Leadway’s risk-adjusted capital position is likely to remain under pressure due to the volatile domestic capital markets and the underwriter’s ambitious growth targets.

It said: “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 per cernt (2010: 39 per cent) and fixed-income holdings were actively increased to six per cent (2010: 0.1 per cent) 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.”

The agency noted that Leadway benefits from a good business profile within local market as an established writer of non-life retail lines and larger commercial risks, adding that additionally, the company continues to grow its life insurance book.

It said in 2011, the company’s total gross premiums increased by 44 per cent to N24 billion ($ 151 million), mainly driven by one large contract within the oil and gas industry (NNPC Insurance account). It added that the life business grew by 75 per cent 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.

It noted that prospectively, Leadway is likely to experience good premium growth in 2012, especially in the life segment.

The agency said positive rating actions would occur if the firm strengthens its risk-adjusted capitalisation and continues to decrease its large equity holdings and investments in unquoted securities.

It noted that 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, adding that deterioration in operating performance also would be seen negatively.

A source in company told Inspen that the drop was due to economic challenges which affected the firms operations.