Africa Re's premium income is expected to increase by about 5% annually over 2021-2022, mostly reflecting the economic recovery in most areas it operates, says S&P Global Ratings.
The anticipated recovery follows some pressure on Africa Re's top line 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 US dollar. S&P anticipates that the Africa Re group is likely to report a premium reduction of near 10% for 2020.
Regarding operating performance, despite some claims related to COVID-19, the group is likely to report a combined ratio slightly below 100% for 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, S&P expects 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).
The global credit rating agency has affirmed its 'A-' insurer financial strength and issuer credit ratings on Nigeria-based Africa Re. The outlook is stable. At the same time, S&P affirmed its 'A-' financial strength credit rating on the guaranteed subsidiary, African Reinsurance Corp (South Africa). The outlook is stable.
S&P says that the affirmation reflects its 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.
With a capital base close to $1bn, Africa Re benefits from a significant capital buffer at the 'AAA' range (measured using S&P's model). That said, given its territorial coverage and exposure, the group has some investments in regions with low asset quality. S&P considers 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 three 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 ($164m as of September 2020 compared with $208m in 2017).
The stable outlook reflects S&P's view that Africa Re will retain its competitive position across its key markets. It also reflects the agency's expectation that the reinsurer will maintain its good underwriting performance and 'AAA' level risk-based capital (measured using S&P's capital model).