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.