June 06, 2018 12:37 PM / S&P Global Ratings
S&P Global Ratings today affirmed its 'A-' long-term issuer credit and insurer financial strength ratings on Nigeria-based African Reinsurance Corp. (Africa Re). The outlook is stable.
At the same time, we affirmed our financial strength credit rating on the guaranteed subsidiary, African Reinsurance Corp. (South Africa) Ltd.
The affirmation reflects our view that Africa Re continues to maintain its strong competitive position within Africa. We consider Africa Re's role as a supranational entity to promote and support the growth of the African insurance and reinsurance markets, given its focus and development mandate in the continent, generally higher-risk countries. In our view, Africa Re's special status also provides a significant competitive advantage as it allows the reinsurer to access business as a "locally admitted" insurer in many regions. Africa Re has a strong brand and reputation with many cedents across Africa, a key differentiator relative to other international and regional players on the continent.
As a result of the above, Africa Re's underwriting portfolio is still highly diversified, which supports overall net profitability. However, the group reported sustained poor underwriting result due to losses within South Africa and other regions in 2018 that weakened the net result. We believe that the various turnaround strategies and actioned underwriting plans will support improved operating performance in the next 12-24 months. We anticipate that this, combined with more selective growth in those select underperforming regions, will enable the group to generate a net combined ratio of around 95% for 2019. Thereafter, we project a net combined ratio toward the lower 90% mark in 2020 and 2021, compared with 96% in 2018 (five-year average: 93%). Africa Re's low combined ratio relative to the regional peer group and international regional players continues to support the rating.
The robust levels of capital sufficiency (as measured by our capital model) within the group are a rating strength. Africa Re has incrementally built up its capital base, with total adjusted capital expected to approach US$1 billion over the next two to three years. We also expect the company's capital levels to remain at the 'AAA' confidence level, despite any adjustment to the capital management strategy.
However, the weighted-average credit quality of Africa Re's investment portfolio continues to constrain the rating. Given Africa Re's territorial coverage and exposure, the group has investments in regions with lower investment quality. We estimate the weighted-average credit quality to be 'BBB', albeit improving toward the upper limit of this range in 2018. Notwithstanding the improvement, this constrains the overall rating of the group, given its susceptibility to financial and macroeconomic stresses in these regions given the insurer's asset and liability exposures.
Africa Re also carries high receivable balances toward select regions. Significant portions of these receivables have a duration beyond one year. Even if these balances are stripped from total adjusted capital, the entity remains comfortably above the 'AAA' confidence level. Furthermore, Africa Re's management has significantly strengthened its risk control practices related to the management of these balances. The absolute amount declined in 2018 and we expect further improvement over the medium term, with management aiming to ensure the duration is no longer than one year by 2022. This, coupled with African Re's liquid asset portfolio, has further improved the group's liquidity, which we assess as exceptional.
Africa Re's financial risk profile is also weakened by the foreign currency mismatches on its balance sheet caused by its exposures across Africa and investments denominated in U.S. dollars, as well as the accompanying bottom-line volatility. However, we note the prudent reserving practices related to this volatility, as well as tightened risk control practices demonstrated over recent periods, which somewhat mitigate this volatility.
The stable outlook reflects our view that Africa Re will retain its competitive position across its key markets. Our base-case expectation is that Africa Re will generate a combined ratio no higher than 95%. We expect levels of capital sufficiency to remain at historical levels and well above the 'AAA' sufficiency as per our capital model. We also expect Africa Re will maintain credit counterparties of similar strength within its investment portfolio and quality of cedents.
We see a positive rating action as unlikely in the next 12-24 months. However, we could raise the ratings on Africa Re if its risk exposures improves, namely to higher weighted-average credit quality at the 'A' range from the current high 'BBB' level, combined with enhanced risk controls.
We would lower the rating on Africa Re over the next 12-24 months if: