AM Best has affirmed the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of “bbb-” (Good) of Continental Reinsurance Plc (CRe) (Nigeria). The outlook of these Credit Ratings (ratings) is stable.
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 (ERM).
CRe’s balance sheet strength is underpinned by risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). While the company benefits from a relatively conservative investment strategy by asset class, invested assets are somewhat concentrated in Nigeria and Kenya, which are both subject to high financial system risks. In recent years, including at year-end 2022, capital buffers in excess of the strongest BCAR threshold have been somewhat depleted, with rapid business growth generating significant volatility in the company’s risk-adjusted capitalisation. CRe has taken steps to improve its capital management capabilities and AM Best expects capital buffers to be replenished in 2023. AM Best will continue to assess the effectiveness of the company’s capital management strategy; however, further erosion of risk-adjusted capitalisation, will likely result in negative rating pressure.
CRe’s adequate operating performance assessment reflects its modest overall profitability and volatile underwriting performance, as demonstrated by its five-year (2018-2022) weighted average combined ratio of 99.1%, which ranged between 95.4% and 105.9% over this period. There is a positive trend in underwriting performance in recent years as the company has benefitted from economies of scale, evidenced by a gradual decline in its expense ratio from a high of 65.2% in 2016 to 43.8% in 2022. Overall earnings have been consistently positive, as demonstrated by a five-year (2018-2022) weighted average return-on-equity of 11.9%, albeit fairly modest when factoring in high inflation and high interest rates across CRe’s key operating markets. AM Best expects underwriting performance in 2023 and prospectively to trend in line with recent years, with overall earnings bolstered by significant FX gains through CRe’s strategy to hold large surpluses of U.S. dollar assets relative to U.S. dollar liabilities.
CRe is a composite reinsurer with a diverse presence across more than 50 countries in Africa. The company has grown significantly in recent years as part of its ambitious growth strategy, with premium reaching NGN 103.2 billion in 2022 (or USD 231.2 million), compared to NGN 34.2 billion in 2018 (USD 94.4 million). Prospectively, AM Best expects a more controlled approach to growth, supported by good long-term growth opportunities as the region’s insurance markets and economies continue to develop.
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