AM Best has affirmed the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” (Excellent) 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 assesses as strongest, as well as its strong operating performance, favourable 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). The company’s risk-adjusted capitalisation benefits from a prudent asset allocation and low underwriting leverage. ARC has significant exposure to the generally high levels of economic, political and financial system risk that are associated with its main operations in Africa. However, AM Best considers that the company is able to offset this risk partially through its significant geographical diversification and conservative asset management strategy, with a substantial proportion of surplus assets held in North America and Europe.
ARC has a track record of strong operating performance over the longer term, despite challenging market conditions, evidenced by its 10-year (2011-2020) weighted average return on equity (ROE) of 11.1%. AM Best notes that ROE should be viewed in the context of ARC’s reporting currency, the U.S. dollar, which somewhat limits the impact of the high local inflation on the company’s reported net income. The company has demonstrated robust non-life underwriting performance over the cycle, posting a 10-year (2011-2020) weighted average combined ratio of 93.8%. However, in recent years underwriting results have weakened, with the combined ratio reaching a high of 99.0% for the year ended 2020. Although AM Best expects the company’s underwriting performance to improve over the medium term as the management team continues to implement corrective actions, the 2021 operating result is expected to be weaker than the long-run average, impacted by unfavorable foreign exchange losses.
ARC operates as a composite reinsurer across Africa, with a focus toward the continent’s largest insurance markets. The company enjoys privileged market access and brand recognition, which 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.
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