A.M. Best affirms ratings of Continental Re, awards B+

Chuks Udo Okonta and Agency report

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of B+ (Good) and issuer credit rating of "bbb-" of Continental Reinsurance Plc (Continental Re), saying that its outlook for both ratings remains stable.

The Agency said ratings of Continental Re reflect its strong risk-adjusted capitalisation, good operating performance and established competitive position in the Nigerian insurance market. Offsetting rating factors include Continental Re’s high level of outstanding premiums and exposure to Nigeria’s socio-economic difficulties.

It noted that Continental Re’s strong risk-adjusted capitalisation 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.

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.

Provisions for outstanding premium debtors rose to 45% of gross written premium (GWP) in 2012 (2011: 40%, 2010: 35%). 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. A.M. Best will continue to monitor Continental Re’s performance relating to the collection of receivables.

AM Best said 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% of GWP, the majority of which is written on a proportional basis.

It noted that there are no current upward rating pressures for the firm, adding that egative rating actions could occur if there were deterioration in Continental Re’s financial performance or erosion of its risk-adjusted capitalisation 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.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.