Chairman AIICO Insurance, Bukola Oluwadiya
By Dipo Olowookere
Global Credit Ratings has affirmed the national scale claims paying ability rating assigned to AIICO Insurance Plc of A(NG), with the outlook accorded as Negative.
GCR explained in a statement yesterday that the rating was affirmed because the insurer’s assets continue to be conservatively managed, with the bulk of investments in risk free Federal Government of Nigeria (FGN) bonds and treasury bills.
It noted that in this regard, cash and equivalent constituted about 83 percent of the investment portfolio at FY16, translating into a strong coverage of technical provisions (1.2x) and average monthly claims (48 months).
This is supported by sound asset liability matching for the long term business, as confirmed by the actuarial valuation report. Key liquidity measures are likely to register within a sound range over the rating horizon.
Capitalisation has moderated over the review period as sustained losses eroded the capital base. In this respect, consolidated capital declined to N7.6 billion at 3QFY17 from N7.9 billion at FY16 compared to N11.6 billion at FY12.
It said while the solvency levels in the short term business remain strong, the long term business evidences material capital shortfalls, especially considering the scale of the book.
However, comfort is derived from the sound asset liability matching, with bulk of the policyholders’ liabilities backed by risk free FGN bonds. Furthermore, statutory solvency on a consolidated basis reflects adequate coverage of assets over liabilities at FY16.
AIICO Insurance has evidenced notable earnings volatility throughout the review period, underpinned by a relatively elevated cost structure, coupled with the declining premium base and an increasing claims level.
Although FY16 reported a significant increase in operating profitability (underpinned by reserve releases due to the slow down on annuity uptake), this was eroded by the net losses on available for sale assets during the year. Going forward, the inherent variability in overall cost structure might continue to impact on the insurer’s earnings capacity, albeit, net profitability is expected to be supported by sound investment returns.
Notwithstanding the consistent decline in gross premiums for the short term business, AIICO’s competitive position remains moderate.
In this regard, consolidated premiums registered a compound annual growth rate of 6.3 percent for the five-year review period, albeit with a declining market share of 8.1 percent in FY16 (FY15: 11.3 percent).
GCR said going forward, continued focus on long term business, coupled with expanded retail exposure may gradually enhance the business profile.
AIICO’s reinsurance program consist counterparties with a sound aggregated credit profile. Note is taken of the elevated level (13 percent) of deductibles per risk and event relative to capital at FY16.
The rating agency said an upward movement of the rating or outlook may follow a sustainable strengthening of solvency metrics and business profile, coupled with the maintenance of liquidity metrics at strong levels.
Conversely, downward movement may result from a sustained weakening in capitalisation levels, and a significant loss of market share or sustained poor operating performance.