By Patience Saghana
Africa Reinsurance Corporation (Africa Re) has been affirmed A_ rating by Standard & Poor’s as a result of its strong competitive position across the continent; strong operating performance based on exceptional stability and strong capitalization.

The ratings, according to S & P’s of Africa Re reflects its strong competitive position in the African insurance markets; strong, stable operating performance; and strong capitalization as the agency expects growth of the corporation to moderate in 2010/2011 to around 11 percent .

Standard & Poor’s has given no credit for the security reserves held. Authorized share capital was increased to $500 million in 2007, from $100 million and Africa Re is now targeting raising its subscribed capital from $100 million to $300 million by the end of 2011, and $500 million by the end of 2015. Assuming these exercises are successful, and then Standard & Poor’s believes Africa Re will have strong capitalization for the foreseeable future.

The sovereign risk inherent in financial operations across a sometimes_volatile region, and the relatively unsophisticated approach to capital management, suggest that Africa Re will continue to maintain an explicitly robust capital base

These positive factors are partially offset by its enterprise risk management (ERM), which, although adequate, lags international reinsurance peers in terms of sophistication. The potentially unstable political and economic environment within the company’s core African markets is, to some extent, mitigated by the company’s shareholder structure and diversified sources of income.

Africa Re continues to enjoy a strong competitive position in the African reinsurance market. Success is based on both its privileged access to business and its relationships within the African insurance community. Africa Re enjoys a strong market share of approximately 9 percent. Outside Africa, the company’s competitive position is necessarily more limited, as non_African business is not part of the company’s core strategy.

Africa Re has demonstrated strong and very stable earnings for many years. In 2009, the group delivered a combined ratio of 97.5 percent, slightly better than the five_year average of 98.3 percent. The return on equity (ROE) of 18.0 percent for 2009 was substantially better than 2008 (9.2 percent) because of favorable exchange rate movements, particularly for the South African rand (ZAR).

Capitalization is strong, reflecting very strong capital adequacy (per Standard & Poor’s risk_based capital model). It was sufficient to support the strong business growth in 2009; gross premiums rose 34 percent in 2009.

Africa Re plans to raise its subscribed capital to $300 million (from $100 million) in 2011 and Standard & Poor’s Ratings Services views the likely success of this capital issue as reflecting the company’s standing with its investors.

Africa Re has adequate ERM, but changing risk dynamics in both Africa Re’s target markets and the peer group reinsurance sector demand increasing sophistication. The company has established a proactive ERM function through the appointment of a chief risk officer, as well as engaging in an ongoing project to improve its risk modeling capabilities.

Africa Re operates across the African continent, in countries with the propensity to experience political or economic turmoil, which may affect the local or regional claims experience, liquidity, or competitive position of the company
The shareholding structure of Africa Re includes the African Development Bank (AFDB; AAA/Stable/A_1) and 41 African governments, which helps mitigate these risks.

The stable outlook reflects Standard & Poor’s expectation that the company will continue to deliver strong operating performances and capitalization. We anticipate that Africa Re will continue to be a lead reinsurer for the African continent and expand its business there. Standard & Poor’s believes the company is well placed to take advantage of opportunities for profitable growth within the continent. ERM will likely continue to evolve favorably, as Africa Re enhances its use of risk modeling.

At the present time, future upward rating movement is limited. Negative rating action may be prompted by instability in the earnings profile and any meaningful dilution of its core African market focus. Also, any uncertainty regarding the planned capital raising targeted for 2011 may damage the financial strength.