AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” of African Reinsurance Corporation (ARC) (Nigeria). The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect ARC’s balance sheet strength, which AM Best categorises as strongest, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).
ARC’s balance sheet strength is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). AM Best expects ARC’s capital position to be supported by high earnings retention, a conservative investment allocation and low underwriting leverage.
ARC has significant exposure to the high levels of economic, political and financial system risk that are associated with operating in the African region.
However, AM Best considers that the company is able to offset this risk partially through its geographical diversification and conservative asset management strategy, with a significant proportion of surplus assets held in North America and Europe.
ARC’s long-term operating performance has been strong, despite challenging market conditions, evidenced by its five-year (2015-2019) weighted average return on equity (ROE) of 9.9 per cent.
AM Best notes that ROE should be viewed in the context of ARC’s reporting currency, the US Dollar, which somewhat limits the impact of the high local inflation on the company’s reported net income.
The company has demonstrated solid non-life underwriting performance, posting a five-year (2015-2019) weighted average combined ratio of 94.2 per cent.
However, underwriting results deteriorated in 2018 and 2019, with non-life combined ratios of 97.9 per cent and 97.4 per cent respectively.
Although AM Best expects the company’s underwriting performance to improve over the medium term as the management team continues to implement corrective actions, 2020 is likely to be another challenging year.
ARC operates as a composite reinsurer across Africa, with a focus toward the continent’s largest insurance markets.
The company’s privileged market access and brand recognition provide ARC with solid long-term growth prospects as the region’s insurance markets develop. AM Best considers ARC’s ERM framework to be suitable given the size and complexity of its operations.