Fitch Ratings has assigned African Risk Capacity Limited (ARC Ltd), the commercial subsidiary of the African Risk Capacity Group (ARC Group), an ‘Insurer Financial Strength (IFS) Rating of ‘BBB+’ and a ‘Long-Term Issuer Default Rating (IDR) of ‘BBB’ with a stable outlook.
Announcing the rating on its website, the global financial rating firm indicated that “the ratings reflect the commitment and credit quality of ARC’s sponsors, as well as the company’s good business profile, very strong capitalisation and leverage….”
Further expatiating on its latest rating of ARC Ltd, , Fitch stated that the ’s capital position is very strong, and a key strength for the rating level, adding that the company benefits from the treatment of the USD67 million of Class C members’ returnable capital as Tier 1 capital under the Bermudan Solvency regime; and as equity capital under Fitch’s Prism Factor-Based Capital Model (Prism FBM).
As a result, ARC Ltd reported a Bermudan enhanced capital requirement (ECR) ratio of nearly 2500% at 31 March 2020, while the company’s score on Fitch’s Prism FBM was “Extremely Strong” at end-2019.
The CEO of ARC Ltd, while expressing his excitement at the Fitch BBB+ rating, Lesley Ndlovu, said : “Obtaining an industry rating is an important enabler for our strategy to access new business by taking on inwards reinsurance, thereby allowing us to better meet the needs of countries by supporting national agricultural insurance schemes and providing capacity to local insurance companies.
“Considering that this is the first time ARC Limited is being rated, we are gratified for being ranked among the top-notch insurance companies in Africa. With only one notch lower than Africa Re, we are encouraged more than ever to leverage our competitive edge towards becoming the best disaster risk insurer in Africa in the service of our Member States”, Ndlovu added.
Similarly, Ibrahima Cheikh Diong, the Group Director-General, ARC Group, believes that a BBB+ ranking of ARC Ltd, by an internationally acclaimed agency like Fitch, should boost the faith of ARC stakeholders in the viability of its model relative to meeting set obligations to the Member States.
He said: “Our approach in providing sovereign disaster risk insurance coverage to African Union Member States is anchored on the mandate to ensure that vulnerable populations receive immediate support upon the trigger of the set parameters. Ultimately, we want to become the development insurer of choice for Africa offering multiple products; and a BBB+ by Fitch is a bold step in this quest.”
ARC Ltd is funded by the UK Department for International Development (DFID) and the German Development Bank KfW. Fitch’s assessment of these funders’ willingness and ability to support ARC results in a one-notch uplift to its standalone credit profile.
In addition to their capital contributions, Fitch believes DFID and KfW provide support to the company that is positive to the credit rating through governance and strategic input, while also facilitating sovereign participation in the business through premium subsidy schemes.
By Fitch’s assessment, ARC’s portfolio diversification is still limited as the company currently offers a single parametric insurance product covering drought risk. Geographic diversification is moderate with the 2019/20 risk pool (‘members’) covering only 11 African Union Member States out of a possible 34, with the number of members having been volatile in prior years.
Fitch expects ARC’s business profile to improve through increased diversification as more countries sign up to the ARC project attracted by a broader range of products.
ARC was established to be managed on a commercial basis and achieve very modest profits, but this remains secondary to the company’s development goals. Fitch believes a degree of risk tolerance is inherent in the company’s underwriting practices as development goals are prioritized over underwriting margins.
The rating actions factored in Fitch’s current assessment of the impact of the COVID-19 pandemic, including its economic impact, under a set of rating assumptions outlined on Fitch’s website.
These assumptions were used by Fitch to develop pro-forma financial metrics for ARC Ltd that are compared with rating guidelines defined in its criteria. Under the rating-case assumptions, ARC Ltd’s credit fundamentals remain good and commensurate with a ‘BBB+’ IFS Rating.