Fitch Ratings has upgraded African Risk Capacity (ARC) Limited’s Insurer Financial Strength (IFS) to ‘A-‘ from ‘BBB+’ and Long-Term Issuer Default Rating (IDR) to ‘BBB+’ from ‘BBB’. ARC’s outlooks are Stable.
The credit rating agency said that this upgrade is based on key rivers of developmental progress, sponsor support, product diversification and strong capitalisation, among others.
It said: The upgrade reflects Fitch’s view of improved willingness of its sponsors to support due to ARC’s strong progress in meeting its development objectives, demonstrated by enhanced claim pay-outs to affected African sovereigns, product diversification and improving reach of its development activities. Strong progress in product diversification initiatives and the improving franchise have also led to a higher company profile score of ‘bbb’.
Fitch also referred to the commitment and credit quality of ARC’s sponsors – which include the German development bank KfW through the Federal Ministry for Economic Cooperation and Development (BMZ), and the UK Foreign, Commonwealth and Development Office (FCDO).
The company enjoys their support and sponsorship in the form of capital contributions, governance oversight and premium subsidisation.
Lesley Ndlovu, ARC Ltd. CEO, commented: “We welcome the Fitch upgrade and see it as a reflection of our efforts to protect African nations from the increasing impact of climate change.
“It is also an acknowledgement of our drive to diversify our portfolio – we now cover the four major perils of drought, flood, tropical cyclone, and outbreaks and epidemics. Going forward, we will continue with our mission of signing up at least 35 African countries and covering more than 200 million people annually by 2025.”
ARC’s profile has been boosted by its specialisation as a parametric insurance provider and its strong track record in claims payouts, Fitch highlighted.
Noting that the introduction last year of an outbreaks and epidemics product followed by a flood risk product this year have strengthened and diversified its portfolio.
“ARC’s operating scale remains small, with reported gross written premiums of $23 million in 2022, a drop from $31 million 2021 due to the non-renewal of some contracts during the year. However, premiums so far in 2023 have strongly recovered and Fitch expects the company’s growing reach and diversification initiatives to support growth in the medium-term,” the rating agency stated.
Another key driver for ARC’s upgrade was its capital position; Fitch commented: “We regard the end-2022 $68 million returnable capital provided by KfW/BMZ and the FCDO as fully loss-absorbing, and consequently treat it as equity capital when assessing capitalisation and leverage. On this basis, ARC scored ‘Extremely Strong’ on Fitch’s Prism Factor-Based Capital Model (FBM) based on end-2022 figures, unchanged from 2021.”
Fitch expects ARC could garner further capital support as it continues to achieve its development goals. Meanwhile its regulatory capitalisation remains strong, with a Bermuda enhanced capital requirement (ECR) ratio of 387% at end-2022 (2021: 796%).
Finally, Fitch assessed ARC’s financial performance and earnings as weak, with its Fitch-calculated combined ratio at 280% in 2022 (2021: 174%, three-year average: 179%).
ARC reported a net loss of $25.3 million in 2022 (2021: $5.3 million net loss), mainly due to the large drought and tropical cyclone-related claims during the year. Net incurred claims increased to $29 million in 2022 from $18 million in 2021.
The rating agency expects ARC’s earnings to remain volatile given the nature of risks underwritten, although reinsurance should help the company limit its net exposure to losses.
