Africa Reinsurance Corporation has been awarded AM Best financial rating of A (Excellent) and the long-term issuer credit rating of ‘A’. The rating firm also said the outlook of these credit ratings is stable.
According to AM Best, the ratings reflect ARC’s balance sheet strength which it categorised as strongest, coming after is its strong operating performance, favourable business profile and appropriate enterprise risk management (ERM).
The strength of its balance sheet is earned by its adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR).
To retain its capital position, ARC will be supported by high earnings retention, a conservative investment allocation and low underwriting leverage. Besides, 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, the company is considered to be 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, the rating agency asserts.
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 percent. However, AM Best cleared 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 rating company said ARC has demonstrated solid non-life underwriting performance, posting a five-year (2015-2019) weighted average combined ratio of 94.2%. However , underwriting results deteriorated in 2018 and 2019, with non-life combined ratios of 97.9% and 97.4% respectively.
The expectation that the company’s performance will improve over the medium term as the management team continues to implement corrective measures is not cast in iron, 2020 is likely to be another challenging year, the x-ray provided by the agency shows.
ARC’s privileged market access as a composite reinsurer across Africa, and brand recognition, provides it 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.