Fitch upgrades ARC Ltd.’s Outlook to Stable with an IFS Rating of ‘A-‘

• ARC Ltd.’s ratingupgrade is based on key drivers of developmental progress, sponsor support, product diversification and strong capitalisation, among others.
• Its strong claims payout track record has also been noted.

Fitch Ratings has upgraded African Risk Capacity (ARC) Limited’s outlook to stable with an Insurer Financial Strength (IFS) rating of ‘A-‘ and a Long-Term Issuer Default Rating (IDR) of ‘BBB+’.

The credit rating agency notes the upgrade is due to ARC Ltd.’s “strong progress in terms of meeting its development objectives, demonstrated by enhanced claim payouts to affected African sovereigns, product diversification and improving the 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 has referred to the commitment and credit quality of ARC’s sponsors. The company enjoys the support and sponsorship of the German development bank KfW through the Federal Ministry for Economic Cooperation and Development (BMZ), and the UK Foreign, Commonwealth and Development Office (FCDO). This is in the form of capital contributions, governance oversight and premium subsidisation.

ARC Ltd.’s specialisation as a parametric insurance provider and its strong track record in claims payouts have boosted its company profile. 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 USD23 million in 2022, a drop from USD31 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.

Fitch deems ARC Ltd.’s capital position as another key driver for the upgrade. “We regard the end-2022 USD68 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.”

The rating agency says it expects that ARC Ltd. 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%).

Comments Lesley Ndlovu, ARC Ltd. CEO: “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.”