African Reinsurance Corp.

Transcription

1 September 22, 2011 African Reinsurance Corp. Primary Credit Analyst: Neil Gosrani, London (44) ; Secondary Contact: Kevin Willis, London (44) ; Table Of Contents Major Rating Factors Rationale Outlook Corporate Profile: Established In 1976 To Promote African Insurance, Reinsurance, And Investment Competitive Position: Regionally Strong, Benefiting From Privileged Access To And Relationships Within The African Insurance Community Management And Corporate Strategy: Stable Management Team And Good Corporate Governance Enterprise Risk Management: Adequate, With Ongoing Development In Key Risk Controls Accounting: International Financial Reporting Standards Adopted In 2005 Operating Performance: Strong, Due To Exceptional Stability Investments: Strong And Increased, But Low Risk Appetite, With Low African Credit Exposure Capitalization: Strong Capital, Supported By Regular Capital Infusions Financial Flexibility: Strong International Support For Developmental Role 1

2 Major Rating Factors Strengths: Strong competitive position across the African continent. Strong operating performance based on exceptional stability. Strong capitalization. Strong liquidity. Operating Company Covered By This Report Financial Strength Rating Local Currency A-/Stable/-- Weaknesses: Some risk controls within enterprise risk management lag behind global peers. Political and economic environment is potentially unstable. Rationale The ratings on Nigeria-based composite reinsurer African Reinsurance Corp. (Africa Re) reflect Standard & Poor's Ratings Services view of its strong competitive position in the African insurance markets; strong, stable operating performance; strong capitalization; and strong liquidity. These positive factors are partially offset by its enterprise risk management (ERM); although adequate, some risk controls lag behind international reinsurance peers in terms of sophistication. The potentially unstable political and economic environment within the company's core African markets is, to some extent, mitigated by the company's shareholder structure and diversified sources of income. Africa Re continues to enjoy a strong competitive position in the African reinsurance market. In our opinion, success is based on both its privileged access to business and its relationships within the African insurance community. Africa Re enjoys a strong market share of approximately 9%. Outside Africa, where the company limits its exposure to no more than 10% of gross premiums, the company's competitive position is necessarily more limited. That said, the company sees opportunities in the Middle East and Asia through its retakaful subsidiary. Africa Re has demonstrated strong and very stable earnings for many years. In 2010, the group delivered a combined ratio of 93.4%, slightly better than the five-year average of 97.2%. The return on equity (ROE) of 21% was the highest level achieved in the past 10 years, reflecting improved underwriting results. Compared to 2009, the impact of favorable exchange rate movements, particularly for the South African rand (ZAR), was considerably lower in 2010 ($3.3 million compared to $13.8 million). In 2011, we do not believe Africa Re has suffered any material losses from the political upheavals in North Africa. Capitalization is strong, reflecting very strong capital adequacy (per Standard & Poor's risk-based capital model) and a growing level of capital redundancy, which is supportive of the company's premium growth. In 2010, Africa Re raised an additional $99 million in fully paid-up capital and total paid up capital is expected to achieve the targeted level of $300 million by the end of Reserves are considered prudent with Africa Re using a combination of a percentage of gross premiums and actuarial estimates to create reported reserves. Liquidity is strong and has benefited from an increase in paid-up capital, strong earnings, and a liquid investment portfolio, which consists largely of fixed income instruments and cash. Standard & Poors RatingsDirect on the Global Credit Portal September 22,

3 ERM within Africa Re is adequate and is following an improving trend. The company has invested heavily in developing its risk management framework. This integrates day-to-day management, policy oversight and independent assessment. Africa Re's risk culture is being embedded throughout the organization through a variety of regular committees covering the company's operations and this is supported by detailed documentation and management information systems. In addition, an increasingly sophisticated approach is being used to model capital, investment, underwriting, and operational risks. Africa Re operates across the African continent, in countries with the propensity to experience political or economic turmoil. Such upheaval may affect the local or regional claims experience, liquidity, or competitive position of the company. Nevertheless, we note that recent turmoil in North Africa has not resulted in a significant deterioration in Africa Re's claims experience or standing. Outlook The stable outlook reflects our expectation that the company will continue to deliver strong operating performances with a combined ratio below 97% and strong capitalization, exhibiting at least strong capital adequacy. We anticipate that Africa Re will continue to reinforce its strong competitive position as lead reinsurer for the African continent and expand its business there, through expanding its contact office network as well as seeking limited opportunities outside the continent. ERM will likely continue to evolve favorably, as Africa Re enhances its use of modeling to better understand and manage the risks the company faces. We feel that future upward rating movement may result from further strengthening of the company's financial profile. This may come from the maintenance of Africa Re's improving capital base and deepening liquidity. We may consider lowering the rating if the company experiences instability in its earnings profile or a significant increase in the proportion of either its non-african or South African businesses above current levels. Also, any uncertainty regarding the planned capital raising targeted for 2011 may damage financial strength. Corporate Profile: Established In 1976 To Promote African Insurance, Reinsurance, And Investment Africa Re was established as a supranational legal entity in 1976 by 41 member states of the African Union and the African Development Bank. Its aim is to promote African insurance and reinsurance and to encourage investment in Africa. No single country or company can hold more than 10% of Africa Re's authorized capital. The company focuses on African reinsurance business with a very small international portfolio. The company benefits from a compulsory cession arrangement across the African region (excluding South Africa), in which 5% of all treaty business ceded by insurers must be offered to the company. Africa Re is not obliged to accept these cessions, and in 2010, around 90% of business written was from voluntary cessions outside this arrangement. The company manages the African Aviation Pool and the African Oil and Energy Insurance Pool for which it receives management fees. It operates from headquarters in Lagos (Nigeria) and through regional offices in Casablanca (Morocco), Nairobi (Kenya), Abidjan (Cote d'ivoire), Cairo (Egypt), Port Louis (Mauritius), and Addis Ababa (Ethiopia). The company also has a wholly owned subsidiary in Johannesburg (South Africa). In mid-2010, a retakaful company was established, operating from Cairo to service the Islamic insurance sector in Africa. 3

4 Competitive Position: Regionally Strong, Benefiting From Privileged Access To And Relationships Within The African Insurance Community Table 1 African Reinsurance Corp. Competitive Position --Year-ended Dec (Mil. $) Total revenue Gross premium written Annual change in gross premiums written (%) Net premium earned Annual change in net premium earned (%) (13.1) Net premium written Annual change in net premiums written (%) (3.4) Total assets under management Growth in assets under management (%) Africa Re has a strong competitive position within the African insurance industry, based on the company's reputation as a specialist regional reinsurance provider of both treaty and facultative covers, which represent 80% and 20% of gross premiums respectively. It has built up this reputation since its establishment in Success is based on the company's privileged access to the African insurance community and its established long-standing relationships with local companies, intermediaries, regulators, and market associations. Most of the business written comes via voluntary cessions, on a direct basis. Africa Re has consolidated its position within the non-life South African market as a key provider of reinsurance capacity, and has benefited from strategic changes at competitors within the market. The business written in South Africa complements the company's traditional competitive strengths. It is a key strategic area, given that South Africa accounts for approximately 80% of total direct premiums (life and non-life) generated on the African continent. The South African portion of Africa Re's total portfolio represents around 40% of total premiums written and this is not expected to change significantly. This is broadly proportionate to South Africa's share of African non-life premiums which was about 50% in Africa Re is viewed as a domestic insurer across the continent, which benefits its competitive standing. The company's links to its cedants across the continent are predominantly direct and long-standing, and managed through eight regional contact offices. We expect Africa Re to open further offices to pursue new opportunities. These typically follow economic development or the discovery of natural resources. The contact offices operate with some autonomy but within broad operating guidelines established by head office. In addition, Africa Re writes business outside of the continent and intends to develop business in the Middle East and Asia through its retakaful subsidiary in Cairo. Nevertheless, no more than 10% of total gross premiums are expected to derive from outside the African continent and its underwriting approach remains conservative. Over the outlook horizon, Standard & Poor's expects the company to achieve premium growth of between 7.5% and 10%. This reflects a stable performance and excludes the sort of one-off gains experienced in the last few years. The portfolio consists mostly of short-tail property business, given the relatively underdeveloped market for liability Standard & Poors RatingsDirect on the Global Credit Portal September 22,

5 products in the continent. Ongoing discussions to restrict the outflow of domestic oil-related revenues, and ensure local participation in all aspects of the oil industry are expected to strengthen Africa Re's energy risk participation in Nigeria and Angola. In the longer term, this could also extend to other African markets, as Africa Re plays a key role in the management of the African Oil and Energy Reinsurance Pool, and employs specialist energy underwriters. Geographically, Africa Re underwrites business in most African countries, indicating a good degree of diversification despite the intrinsic political and economic volatility of the region. Based on its own estimates, Africa Re enjoys a strong African market share of 9%. The company's leadership credentials on the continent, outside of South Africa, are well established. Africa Re's distribution by gross premium is 37% direct and 63% via brokers. In the South African subsidiary, however, broker distribution accounts for 91%, which reflects the broker-driven nature of that market. We believe the move toward open contact offices and the emphasis on service and prompt responses to quotation requests and payments may offer Africa Re some advantages over peers. Relationships are further reinforced by the supportive influence of Africa Re's shareholders, comprising 41 African governments and 103 African insurance and reinsurance companies. In aggregate, these hold 71% of issued share capital. Around 17% of business annually was from cedants with an equity stake in Africa Re, offering a good degree of stability, client loyalty, and mutual interest in the performance of the business. African compulsory cessions require that 5% of all the treaty business ceded by insurers in member countries must be offered to Africa Re (although the corporation does enjoy the right of refusal). In our view, these are broadly stable. However, as premiums written outside the arrangement increase and stricter underwriting controls reduce the acceptance level, we expect the importance of these compulsory cessions to decline. They accounted for only 9% of total premiums in 2010 and are gradually diminishing. Five 'AAA' rated development finance institutions (DFI), including the African Development Bank (ADB; AAA/Stable/A-1+), International Finance Corporation (IFC; AAA/Stable/A-1+), Deutsche Investitions- und Entwicklungsgesellschaft mbh (DEG, member of KfW Banking Group; KfW is rated AAA/Stable/A-1+), and Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO; AAA/Stable/A-1+) hold 29% of share capital. The involvement of the DFIs endorses Africa Re's position in the financial community and is an alternative capital source, but offers only limited commercial benefit. Africa Re has only a small portfolio of life business (3% of 2010 gross premiums) comprising mortality risks only. This does not include any South African business. Business is expected to grow gradually over the rating horizon, but remain a small proportion of the overall business. We consider that Africa Re does not qualify for any rating support as a commercial government-related entity because of the diverse nature of the government backing. We understand that Africa Re is a supranational entity with significant shareholdings by governments in totality. However, it does not carry out a purely public policy role, given the joint participation by insurance company investors, and therefore does not benefit from government support in the rating. South Africa In 2010, African Reinsurance Corp. (South Africa) Ltd. (ARCSA; not rated) contributed 40% to Africa Re's total premium income and 17% of its net profit. ARCSA was created in 2004 in accordance with regulatory demands for reinsurers to operate through local companies, and protects Africa Re's existing franchise in the country. ARCSA's 5

6 position in non-life business remains largely unchanged with a market share of around 20%. The portfolio is significantly weighted to short-tail property and motor risks. The South African limit for bodily injuries in motor business is ZAR2.5 million ($0.4 million), which means that the company is primarily exposed to the frequency risk of own damage and theft. Africa Re is establishing a facultative underwriting team to participate in planned infrastructure investments over the next three to four years. This suggests that its risk profile is likely to increase, given its limited involvement or historical underwriting expertise in large complex risks. Management And Corporate Strategy: Stable Management Team And Good Corporate Governance Strategic positioning Africa Re's main strategy is for the company to continue to work with the African insurance community in developing risk protection. The capital invested by the DFIs endorses this pan-african development role. Africa Re benefits from a clearly enunciated business plan, with defined metrics for lines of business and geographic operating areas. The focus remains on: Servicing clients in profitable markets; Expanding the network of contact offices Growing the company's profitability; Exploiting the opportunities from natural resources discoveries across the continent; and Seeking opportunities in the Middle East and Asia through the retakaful subsidiary. The medium-term plan is supported by regular reviews at both regional and head office level. We view the strategy as incremental, building on the company's successes and not subject to dramatic or unexpected shifts in focus or direction. Over the years, Africa Re has proven its ability to convert its strategic intent into constructive action. This continued throughout 2010, when both strategic and financial targets were met or are on target to be met. Operational effectiveness We are confident that Africa Re's management will deal effectively with the difficulties of operating a pan-african reinsurance company, given their deep and thorough knowledge of insurance and the African market. These difficulties include lack of sophistication among cedants and the political and economic environment. Unusually for a company of its size, succession planning for senior positions within the company is deeply embedded, to the extent that the current CEO shadowed that position for around two years prior to taking over the role. We do not expect any significant senior management changes over the ratings horizon. Financial management The stability of Africa Re's long-term earnings demonstrates a conservative approach to financial management. Africa Re's financial objectives through to 2013 remain broadly unchanged: ROE: 14%-17% Loss ratio: 61%-66% Combined ratio: 92%-97% Return on revenue: 8.7%-12.2% The company is expected to raise an additional $100 million paid-up capital by the end of 2011 and a further $200 Standard & Poors RatingsDirect on the Global Credit Portal September 22,

7 million by 2015, largely from existing shareholders through a rights issue. The funds will be used to support the growth of the company, which is expected to benefit from economic growth across the continent. Africa Re has modeled a targeted level of capital for the overall business and clear operating targets are in place by line of business and region. The capital increase and more detailed targets support a move towards greater sophistication, which in part is driven by changing regulatory requirements in South Africa. The longer-term view now taken by Africa Re significantly enhances our view of the company's ability to manage future growth, and adapt to the challenges posed by the increased retention of risks within the African insurance markets. Governance and financial policies Corporate governance procedures appear to be in line with accepted international standards. Although Africa Re is not regulated by any insurance supervisory body, it is a multinational operation, and its South African subsidiary, ARCSA, is subject to the normal commercial and prudential regulations of the authorities in the Republic of South Africa. In addition, Africa Re benefits from a supervisory board of independent directors, which monitors the executive management of the company. Six of the board members are also heads of national insurance supervisory agencies, and a permanent board position is held by each of ADB, IFC, and DEG. Enterprise Risk Management: Adequate, With Ongoing Development In Key Risk Controls ERM within Africa Re is adequate in our view and is following an improving trend. The company has invested heavily in developing its risk management framework, which integrates day-to-day management, policy oversight and independent assessment. Africa Re's risk culture is being embedded throughout the organization through a variety of regular committees covering the company's operations. This is supported by detailed documentation and management information systems. Africa Re's capital modeling is used at a high level to determine the level of capital required overall as well as at subsidiary level. It is also used to determine its exposure to natural catastrophes and the most appropriate structure for the company's retrocession program. Furthermore, the risk modeling looks at the required capital for Africa Re's underwriting and investment exposures by asset class. The ongoing development of this modeling is expected to lead to a greater and more detailed focus on risk-adjusted returns in the future. This will help Africa Re manage any potential earnings volatility as its risk profile evolves to underwrite more complex risks and takes on greater investment risks. In addition to capital modeling, Africa Re has introduced tools to manage its operational risks and these are also expected to benefit the company's strategic risk management in due course. We note, however, the company's traditional approach to reserving, which uses a percentage of gross premiums with some actuarial oversight. Pricing incorporates cost of capital and profit as a percentage loading on the technical price. In our opinion, while this is adequate for Africa Re, it is somewhat more simplistic and lags behind the approach taken by international peers. Africa Re's strong geographic diversity owes more to its founding edict, shareholder structure, and strong relationships than to a controlled effort to diversify risk and optimize capital. Despite the remote risk of significant losses arising from natural hazards within Africa, aggregations are now being monitored from a risk perspective using the established CRESTA (Catastrophe Risk Evaluating and Standardizing Target Accumulations) zones on the continent. 7

8 Accounting: International Financial Reporting Standards Adopted In 2005 Africa Re adopted International Financial Reporting Standards (IFRS) in 2005, and we consider the accounts to be transparent, with no audit qualifications. Africa Re is exempt from taxation, except in the South African market. Standard & Poor's has considered the impact of the company's prudential reserves, established and supplemented every year since No capital credit has been given for these reserves. However, their impact has been factored into our analysis of earnings. Operating Performance: Strong, Due To Exceptional Stability Table 2 African Reinsurance Corp. Operating Performance --Year-ended Dec (Mil. $) Return on revenue (%) Return on equity (%) EBIT adjusted to Total equity adjusted (%) EBITDA adjusted to Capital (%) EBIT EBIT adjusted EBITDA EBITDA adjusted Net loss ratio (%) Net acquisition expense ratio (%) Administrative expense ratio (%) Net combined ratio (%) Net investment yield (%) Africa Re continues its very stable earnings track record, aided by its relatively low exposure to high-severity losses. The company's earnings are considered strong, having achieved an average combined ratio of 97% over the past five years. It has also demonstrated exceptionally stable underwriting performances, and its rapid growth in South Africa has not undermined this trend. We expect Africa Re to achieve the following targets, which have been set to 2013: ROE: 14%-17% Loss ratio: 61%-66% Combined ratio: 92%-97% Return on revenue: 8.7%-12.2% Africa Re's use of retrocession protection is gradually reducing, to 8.5% in 2010 from 11.8% in The potential for earnings volatility has therefore increased although gross underwriting performance has been consistently strong. This suggests that the higher net retentions adopted will not lead to a fall in earnings, a view backed up by the company's modeled analysis of the retrocession protection. Standard & Poors RatingsDirect on the Global Credit Portal September 22,

9 Historical The combined ratio has averaged 96.4% over the last 10 years and has not deviated outside a 93%-99% range over the same period. This is typically reflective of a proportional book of business and suggests a good level of technical competence and underwriting controls. In this case, however, the ratio also benefits from the relatively benign loss and pricing environment in Africa (excluding South African and international business). In 2010, the combined ratio was 93.5% (2009: 97.4%), and ROE was 20.7% (2009: 17.6%); return on revenue increased to 10.7% from 9.0%. The stability of underwriting performance is reflected in the component parts of the combined ratio. The gross loss ratio averaged 59.8% between 2006 and 2010, with a high of 63% in 2009 and a low of 56% in Over the same period, the net loss ratio averaged 64.8% with a high of 67% and a low of 62%. Prospective We expect Africa Re to continue to deliver strong operating performances, with a combined ratio better than 97%, an ROE above 14% and a return on revenue above 8.7%. We expect the regulatory changes relating to the implementation of the Solvency Assessment and Management regime in South Africa to have some effect on the company's expense ratio. However, we still anticipate that the targeted net combined ratio will be met. The stability and strength of Africa Re's earnings will support the company's capital strength and expansion plans over the medium term. Investments: Strong And Increased, But Low Risk Appetite, With Low African Credit Exposure Table 3 African Reinsurance Corp. Liquidity And Investments --Year-ended Dec (Mil. $) Liquidity ratio (x) Invested assets to total assets (%) Invested assets to loss and unearned premium reserve (%) N.M. N.M. Non-life: liquid assets to technical reserves N.M. N.M. Common equity investments to capital (%) Real estate investments to capital (%) Total invested assets adjusted General account invested assets Separate accounts/unit linked assets N/A N/A N/A N/A N/A Investment portfolio composition Cash and cash equivalents (%) Total bonds (%) Common stock (%) Real estate (%) Total mortgages and loans (%) N/A N/A N/A N/A N/A Investments in affiliates (%) N/A N/A N/A N/A N/A Investments in partnerships, joint ventures, and other alternative investments - portfolio composition (%) N/A N/A N/A N/A N/A Other investments (%) N/A N/A N/A N/A N/A 9

10 Table 3 African Reinsurance Corp. Liquidity And Investments (cont.) Total portfolio composition (%) N/A--Not applicable. N.M.--Not meaningful. The approach to investments remains largely unchanged with Africa Re placing an emphasis on capital preservation, return and liquidity. The company targets a diversified portfolio of cash, fixed income instruments, and equities and seeks securities with low volatility. Africa Re's invested portfolio is largely spread across Europe and the United States. However, the company aims to increase its exposure to African debt and equity issues. Active currency risk taking is discouraged, and the group asset-liability matches targets at 95%, and ARCSA at 100%. At March 31, 2011, 70.3% of investments were held in cash assets. The principal custodians are Barclays Bank PLC (AA-/Negative/A-1+), Absa Bank Ltd. (Api unsolicited rating), and Rand Merchant Bank (not rated), although in total over 20 banks are used. The bond portfolio of $142 million (22.3% of total invested assets) has an average rating of 'A'. Performance of external fixed income managers against their respective benchmarks was poor and two managers out of four outperformed. This is being carefully monitored and measured over a three-to-five year horizon. The equity component of Africa Re's portfolio is 7.4% or $48 million and is split between private equity and listed equities. Listed equities are invested primarily in South African, Western European, and North American corporations and are managed by external fund managers. Most of the fund managers exceeded their benchmark to March Investment strategy Africa Re's investment strategy remains largely unchanged and focused on liquidity and return while preserving capital. The key liquidity measure is to cover gross claims exposures by bank funds (December 2010: 111%).The company's investment policies target an outperformance of relevant asset class benchmarks over a three-to-five year horizon. The company utilizes in-house investment expertise for its held-to-maturity fixed income portfolio, but uses the services of external fund managers for equities and other fixed income instruments. The company's asset allocation strategy aims to evolve over the medium term to target the data contained in table 4. Table 4 African Reinsurance Corp. Asset Allocation, 2011 Asset class Target allocation (% of total portfolio) Q actual Cash Instruments Fixed Income Equities Within the above asset classes, Africa Re aims to grow the African portion of its overall portfolio. It has targeted African issues to comprise up to 10% of its fixed income portfolio and up to 10.5% (comprised of 7.5% South African equities and 3% other African equities) of its equities portfolio. The company has formulated policy guidelines to alleviate the impact of, among other things, concentration and illiquidity arising from investments in Africa. Credit risk We view credit risk as moderate, reflecting the predominance of strongly rated banks and bond holdings in Africa Re's portfolio. Africa Re has a counterparty limit of no more than 20% but keeps to less than 15%, with the Standard & Poors RatingsDirect on the Global Credit Portal September 22,

11 exception of Barclays Bank at 15.9%. Counterparty risk from reinsurers is low. Market risk In our opinion Africa Re's market risk is moderate, reflecting the relatively low proportion of funds in equities and real estate. The amount of risk will rise as the investment portfolio expands and new capital is received, but the controls in place are expected to manage potential volatility. Liquidity Liquidity is expected to remain strong, benefiting from additional capital injections between now and 2015, strong earnings and a liquid investment portfolio. Liquid assets coverage of net technical reserves was 120% in 2010, which shows a slight improvement on the year before when it was 113%. Africa Re aims to have sufficient bank funds to cover gross claims exposures; the ratio was 111% in December Any recoverability concerns associated with the insurance debts due from Africa Re's cedants are mitigated by the wide dispersion of clients outside of South Africa, and the right of offset in respect of amounts due to shareholders. Capitalization: Strong Capital, Supported By Regular Capital Infusions Table 5 African Reinsurance Corp. Capitalization --Year-ended Dec (Mil. $) Reinsurance utilization (%) Africa Re has strong capitalization, reflecting capital adequacy redundancy above the rating level and a high quality of capital. We have given no credit for the security reserve held of $31.3 million or 9% of total shareholders' funds. Paid-up share capital is expected to increase to $300 million by the end of 2011, and to $500 million by 2015, although the mix of African sovereigns, insurance companies, and DFIs is not expected to change. On the assumption that the current and future rounds of capital raising are successful, we expect Africa Re to maintain capitalization at least at a very strong level for the foreseeable future. Capital adequacy We assess capital adequacy as at least very strong and in our view it is supported by an increase in paid-up share capital (from $100 million in 2009 to $199 million in 2010) and no leverage. We expect this rise combined with future retained earnings to fully support Africa Re's plans for premium growth. Reserves Reserves appear prudent, based on the slightly positive run-off pattern since Reserves are typically short-tail, with 70%-80% of claims settled by the third development year. ARCSA has established incurred-but-not-reported reserves equivalent to 10% of net premiums written across all lines of business except liability (50%), which appears prudent given the lack of historical experience data. Claims reserves are set as the higher of figures received from ceding companies and actuarial methods which target sufficiency at the 75th percentile. Ever since it shifted to IFRS single-year accounting in 2005, the company has set aside a security reserve of $31.3 million. There has been no release from this reserve and we have excluded it from our assessment of capital 11

12 adequacy. Retrocession Retrocession protection at Africa Re is considered sound, and has improved in credit quality as higher-rated retrocessionaires enter the African market. Management has reviewed the structure of the program through industry-standard dynamic financial analysis techniques, to ensure that the company is retaining an appropriate level of risk based on an economic view. Following this analysis, we expect that the level of retention will continue to increase, within acceptable risk tolerances given the historical gross performance and the capital base. The property catastrophe program is structured to provide protection up to a one-in-250-year aggregate property loss, and is modeled on the South African and Kenyan portfolios. While this represents a risk relating to nonmodeled exposures, the geographic diversity and low catastrophic experience across the region provides some comfort. Of the outward property treaties, 40%-60% are placed within Lloyd's (A+/Stable/--). Although several syndicates subscribe to the treaties, this concentration increases the risk of a Lloyd's-specific event causing either a withdrawal of capacity or recovery issues. The remainder is widely placed with a mixture of international and regional companies. A 70% whole-account quota-share treaty and stop-loss contract from Africa Re protects ARCSA's net account, although the amount of cover may be reduced in future years as ARCSA matures. Financial Flexibility: Strong International Support For Developmental Role We believe that Africa Re has strong financial flexibility, demonstrated by its capital-raising programs of recent years. Its ability to attract investment from the DFIs indicates the strong level of international support for the company in its development role. Africa Re's ability to raise additional capital is constrained by the 25% cap on non-african investors. That said, the indicated willingness of shareholders to provide additional equity counters this issue. Africa Re is planning to raise capital via a rights issue, and has a targeted level of $500 million paid-up capital by In addition to injecting equity, key DFI shareholders and other investors have expressed an interest in a debt issue by Africa Re. This option remains open to the company, but given the anticipated capital increase over the next four years, we expect such an exercise to be a long-term goal. Ratings Detail (As Of September 22, 2011)* Operating Company Covered By This Report African Reinsurance Corp. Financial Strength Rating Local Currency Counterparty Credit Rating Local Currency A-/Stable/-- A-/Stable/-- Domicile *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Nigeria Standard & Poors RatingsDirect on the Global Credit Portal September 22,

13 Additional Contact: Insurance Ratings Europe; Additional Contact: Insurance Ratings Europe; 13

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