The ratings reflect CRe’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management.
CRe’s balance sheet strength is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). CRe’s BCAR benefits from its relatively conservative asset allocation, with over three quarters of the company’s investment portfolio invested in cash and fixed-income securities at year-end 2020.
An offsetting factor is the high level of volatility in the company’s risk-adjusted capitalisation in recent years. CRe’s high premium growth has outpaced its ability to generate capital organically, leaving it reliant on parental support in the form of capital injections in 2018 and 2020 to ensure that BCAR scores remained supportive of the current balance sheet strength assessment. Prospectively, if CRe’s risk-adjusted capitalisation erodes over a sustained period, this will generate negative pressure on its ratings.
CRe’s adequate operating performance reflects its modest overall profitability and volatile underwriting performance, as demonstrated by its five-year (2016-2020) weighted average combined ratio of 103.4%, which ranged between 96.9% and 117.8%. Underwriting performance has been negatively impacted by the company’s high (albeit declining) expense ratio, which has remained above 44% in each of the past five years, as well as the persistent and material devaluation of the Nigerian Naira.
Overall operating profitability has been modest when factoring in local inflationary conditions, demonstrated by a five-year weighted average return-on-equity of 11.3%, supported by investment returns in excess of 7% over the same period. As CRe continues to execute its growth plan, AM Best expects the company’s operating performance to benefit from a reduced expense ratio as a consequence of economies of scale.
CRe is a composite reinsurer with a presence across more than 50 countries in Africa, although premium volumes are skewed toward West African insurance markets. The company has an ambitious growth strategy to enhance its presence in its core markets and expand its footprint in territories with attractive profit potential.