A.M. Best has affirmed the financial strength rating of B+ (Good) and the issuer credit rating of "bbb-" of Continental Reinsurance Plc (Continental Re) (Nigeria). The outlook for both ratings is stable.
The ratings of Continental Re reflect its strong risk-adjusted capitalisation, solid operating performance and established competitive position in the Nigerian insurance market. Partly offsetting these positive rating factors are Continental Re’s high level of outstanding premiums and exposure to Nigeria’s socio-economic difficulties.
Continental Re’s strong risk-adjusted capitalisation continues to reflect its low net underwriting leverage, which is partially offset by its high investment risk exposure. The company has a sizeable exposure to unlisted securities (representing approximately 20% of total investments), which relate mainly to unquoted equities and fixed-income bonds. These investments are considered to be illiquid.
Continental Re’s earnings remained at a solid level in 2013, supported by strong underwriting and investment results. Although operating performance is expected to remain positive, reflecting the relatively low claims activity in its target markets in Sub-Saharan Africa, technical margins are likely to continue to be affected by Continental Re’s high expense base due to the lack of scale in its operations.
Continental Re maintains a high level of net outstanding premium debtors, totaling 42% of gross written premium in 2013 (2012: 45%). Around one-third of these receivables are for future pipeline premiums, which relate to income due to Continental Re, but is yet to be invoiced, with the remainder in respect of outstanding trade receivables. Although Continental Re has benefited somewhat from the new regulation in Nigeria, which prohibits the underwriting of insurance contracts without full payment of premiums in advance, the company remains exposed to premium collection delays in its other target markets.
Continental Re maintains a solid business profile in Nigeria, being the sole 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 subsidiaries, which act as hubs to increase its access to various markets within the continent.
Upward rating action is unlikely in the near term. Negative 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 its 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.
In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure.
This rating announcement has been issued by A.M. Best Europe – Rating Services Limited, which is a subsidiary of A.M. Best Company. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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