S&P Raises Munich Re Africa Ratings

Standard & Poor’s Ratings Services has raised its long-term counterparty credit and insurer financial strength ratings on South Africa-based reinsurer Munich Reinsurance Co. of Africa Ltd. to ‘A’ from ‘A-‘ with a stable outlook.

In a companion announcement, S&P also said it has raised its ratings on Hannover Reinsurance Africa Ltd. to ‘A’ (See following article).

S&P said the “upgrade is based on the extensive reinsurance protection provided to Munich Re Africa by the Munich Re group (Munich Re; core entities are rated AA-/Stable/–). This explicit support allows the rating to be raised to the level of the transfer and convertibility (T&C) assessment on the Republic of South Africa, which is currently ‘A’ (foreign currency sovereign credit rating, BBB+/Negative/A-2, local currency A+/Negative/A-1).”

S&P also cited “stand-alone characteristics,” which it said were “reflected in the rating.” These include the company’s strong capitalization and strong operating performance.

However, the rating agency noted that the positive factors were somewhat offset by the “constraints placed on Munich Re Africa’s competitive position by the small absolute size of the South African market.”

“Munich Re Africa benefits from extensive explicit parental support in the form of intragroup reinsurance, particularly in respect of its non-life portfolio,” added credit analyst Matthew Day. “This includes a substantial quota share placed with the group, as well as an extensive stop-loss agreement and business-line-specific excess-of-loss arrangements protecting peak risks. This explicit support allows the rating to be raised as high as the ‘A’ T&C assessment on South Africa.”

Munich Re Africa’s strong capitalization is based on the company’s very strong capital adequacy, adequate reserves, and prudent use of retrocession. No significant change is expected in any of these factors over the rating horizon.

Munich Re Africa’s competitive position, while good, is constrained to some extent by the small absolute size of the South African market and the potentially volatile domestic business environment.

Day explained that the “stable outlook reflects our expectation that the extensive reinsurance protection provided to Munich Re Africa by its ultimate parent will remain in place. If this explicit parental support is removed or significantly reduced, the ratings could be revised downwards.”

Movement in the rating could also occur if the T&C assessment on South Africa were raised or lowered from its current level.

Source: Standard & Poor’s – www.standardandpoors.com