Reviews & Outlooks | |
Reviews & Outlooks | |
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Wednesday,
January 20, 2021 / 01:35 PM / By S&P Global Ratings / Header Image
Credit: African Reinsurance Corp
S&P Global Ratings today affirmed its 'A-' insurer
financial strength and issuer credit ratings on Nigeria-based Africa Re. The
outlook is stable.
At the same time, we affirmed our 'A-' financial
strength credit rating on the guaranteed subsidiary, African Reinsurance Corp.
(South Africa) Ltd. The outlook is stable.
The affirmation reflects our view that Africa Re
continues to maintain its strong competitive position within Africa. It enjoys
a strong brand and reputation with many cedants across Africa, a key
differentiator relative to other international and regional players on the
continent.
In common with some of its peers, Africa Re's top line
faced some pressure during 2020 due to the COVID-19 pandemic, which caused
economic activity to slow, the oil price to decline, and the depreciation of
African currencies relative to U.S. dollar (reporting currency). We therefore
anticipate that the group is likely to report a premium reduction near 10% for
year-end 2020. We expect Africa Re's premium to increase by about 5% annually
over 2021-2022, mostly reflecting the economic recovery in most areas it
operates.
Regarding operating performance, despite some claims
related to COVID-19, the group is likely to report a combined (loss and
expense) ratio slightly below 100% for year-end 2020. This is partly due to
lower claims frequency in its motor portfolio in common with peers. As a
result, Africa Re's return on equity is likely to be about 5%. For 2021-2022 we
expect the group's combined ratio to be about 97%. This partly reflects the
benefits of corrective underwriting actions, which have already improved the
underwriting performance of its business emanating from South Africa and the
Middle East (close to 20% of total premium).
With a capital base close to $1 billion, Africa Re
benefits from a significant capital buffer at the 'AAA' range (measured using
our model). That said, given its territorial coverage and exposure, the group
has some investments in regions with low asset quality. We consider that such
exposures raise susceptibility to financial and macroeconomic stress in these
regions.
Africa Re benefits from a highly liquid asset
portfolio, given its large allocations geared toward investment-grade bonds
with short durations (about 3 years) and bank deposits. The liquid assets cover
the net technical reserves (after reinsurance) by more than 2.5x. Furthermore,
in recent years, management has taken appropriate actions to reduce its
reinsurance receivables. This led to a reduction in the amount recoverable
($164 million as of September 2020 compared with $208 million in 2017).
The stable outlook reflects our view that Africa Re
will retain its competitive position across its key markets. It also reflects
our expectation that the reinsurer will maintain its good underwriting
performance and 'AAA' level risk-based capital (measured using our capital
model).
We would lower the rating on Africa Re over the next
12-24 months if:
We could raise the ratings on Africa Re if it
sustainably posts good combined ratios in line with 'A' rated peers while
maintaining its strong competitive position and 'AAA' level capital.
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