Ratings Roundup: Continental Re (Nigeria), SCR (Morocco)

July 25, 2013

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Nigeria’s Continental Reinsurance Plc, both with stable outlooks. The ratings of Continental Re reflect its “strong risk-adjusted capitalization, good operating performance and established competitive position in the Nigerian insurance market,” Best said. As offsetting factors Best noted “Continental Re’s high level of outstanding premiums and exposure to Nigeria’s socio-economic difficulties.” The report indicated that Continental Re’s “strong risk-adjusted capitalization continues to reflect its low net underwriting leverage, although partially offset by its high investment risk exposure. The credit quality of Continental Re’s reinsurers is strong. At year-end 2012, all reinsurance recoverables were from reinsurers that maintained secure ratings.” In addition Best noted that “Continental Re’s earnings remained at a good level in 2012, despite large single risk losses during the year. Operating results in 2013 are expected to remain positive, reflecting the relatively benign loss environment in Sub-Saharan Africa. However, technical margins are likely to be affected by the company’s high expense base due to the lack of scale in its operations.” Best also pointed out that “provisions for outstanding premium debtors rose to 45 Percent of gross written premium (GWP) in 2012 (2011: 40 Percent, 2010: 35 Percent). The rising trend in outstanding debtors is a negative rating factor given the problems with premium collection in Africa. New regulations issued in Nigeria in 2013, which prohibit the underwriting of insurance contracts without full payment of premiums in advance, are likely to improve premium collection and liquidity for the industry as a whole.” Best added that it “will continue to monitor Continental Re’s performance relating to the collection of receivables.” The report also indicated that “Continental Re maintains a good business profile in Nigeria, being the only private local reinsurer. Premiums sourced from Nigeria account for approximately two-thirds of its business. The company continues to develop its profile across Africa, through the establishment of regional offices. Non-life reinsurance business dominates Continental Re’s portfolio, representing approximately 80 Percent of GWP, the majority of which is written on a proportional basis.” In conclusion Best said: “There are no current upward rating pressures. Negative rating actions could occur if there were deterioration in Continental Re’s financial performance or erosion of its risk-adjusted capitalization to a level considered unsupportive of its current rating level. Additionally, deterioration in country risk factors associated with Continental Re’s operations in Africa could negatively impact the company’s ratings.”

A.M. Best Europe – Rating Services Limited has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Morocco’s Société Centrale de Réassurance (SCR). Best said the “ratings reflect SCR’s adequate risk-adjusted capitalization, good business profile in the North African markets and explicit support provided by the Moroccan state.” As an offsetting factor Best cited “the potential volatility in SCR’s future technical performance.” Best said the “negative outlook reflects the pressures on the creditworthiness of the Moroccan state, which provides explicit support to SCR through a comprehensive loss absorption agreement. In 2012, SCR reported a decline in its risk-adjusted capitalization, driven by a decrease in unrealized investment gains. Despite this decline, capitalization remained supportive of SCR’s ratings. SCR’s capital remains exposed to local financial market volatility, and its retained earnings are dampened by the cost associated with the guarantee provided by the Moroccan state and the high dividend requirements of its main shareholder, state-owned Caisse de Depôt et de Gestion.” Best also explained that “despite SCR producing strong results in recent years, prospective earnings are likely to decrease due to a continuing reduction in business written and the phasing out of mandatory cessions in Morocco by year-end 2013. Furthermore, expansion into open market business may increase the company’s earnings volatility.” Best also noted: “SCR maintains a strong competitive position as the leading reinsurer in the Moroccan market. The company’s business profile should further benefit from its pivotal role in the new natural catastrophe protection system, which is expected to be implemented within the next two years. The additional premium income expected to be generated by this scheme is likely to partly offset the reduction in business volume generated through the gradual phasing out of legal cessions.” In conclusion Best said: “Upward rating movement is unlikely at this time. Downward rating pressure could occur if SCR’s open market business produced poor technical performance, if the socio-political and economic conditions in Morocco were to deteriorate, or if the terms of the current explicit state guarantee were to become less favorable to the company.”

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