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Nigeria: Continental Re targets East African expansion to reduce naira exposure

By David Whitehouse

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Posted on July 25, 2023 05:00

Nigerian naira and U.S. dollar banknotes are seen in a picture illustration © Continental Re has reduced its exposure to naira volatility.  REUTERS/Afolabi Sotunde
Continental Re has reduced its exposure to naira volatility. REUTERS/Afolabi Sotunde

Nigerian reinsurer Continental Reinsurance is eyeing East Africa expansion as it shields itself from the turbulence in the local market.

Nigeria’s Continental Reinsurance, Africa’s largest privately owned reinsurer, wants to expand in the east of the continent to reduce its exposure to naira volatility, CEO Lawrence Nazare tells The Africa Report.

Nazare says he’s “comfortable” with the company’s existing West African presence, and sees East Africa as the region with the brightest growth outlook.

“We are very optimistic about that region,” with prospects bolstered by the Democratic Republic of the Congo joining the East African Community in 2022, Nazare says.

Africa’s ability to access reinsurance has been hampered in recent years by a long-term upward move in global rates which predated Covid-19. To be able to meet more of the continent’s needs itself, the African industry needs a phase of raising capital to be followed by an “inevitable” process of consolidation in coming years, Nazare says.

In East Africa, he sees potential to create a “strong, harmonised reinsurance market. I see being opportunities,” for acquisitions, he says. For now, his focus is on organic growth but “if there are opportunities for consolidation it’s logical that we would take part.”

Continental Re’s balance sheet is mainly in dollars, and the impact of the decision to float the naira by Nigerian president Bola Tinubu is cushioned by geographical diversification, Nazare says. He welcomes Tinubu’s move.

“We would have been comfortable if the currency had been floated earlier,” he says. “The policy of keeping it strong was not in anyone’s best interests,” as underwriters want to avoid dealing with exchange-rate distortions. “Better late than never.”

The company has a financial strength rating of B+ from AM Best. The ratings agency says the rating reflects “modest overall profitability and volatile underwriting performance”, with a combined ratio, which divides losses and expenses by premiums earned, ranging from 95.4% and 105.9% between 2017 and 2021.

Inflation woes

Continental Re was set up in Nigeria in 1985 and has been a composite reinsurer, offering life and non-life reinsurance, since 1990. The company writes business in more than 50 African countries and has client service centres in Nigeria, Botswana, Cameroon, Côte d’Ivoire, Kenya and Tunisia.

Over the last 10 years, Nazare says, the company’s geographical diversification was always intended to offset the impact of naira volatility. Today about 30% of Continental Re’s business is in Nigeria, compared with about 65% ten years ago. Naira’s weakness is further cushioned by the fact that a significant part of the Nigerian book is for dollar-denominated oil and gas reinsurance.

The inflationary impact of a weaker naira is a headache for Nazare. He describes inflation as “one of the greatest enemies of insurance” and says the stability of the value of premiums is “absolutely important.”

The value of claims is also set to increase, and Nazare predicts “pain” over the next 12 to 24 months in Nigeria in terms of claims inflation. Kenya presents the same challenge, he says. “It is inordinately difficult to manage a claims book in any inflationary environment.”

Once greater naira stability is achieved, Nigeria’s reinsurance market will become more attractive, Nazare says. Longer-term growth prospects mean that further reduction in the company’s exposure to Nigeria is likely to be marginal. Nazare says that between 25% and 30% is “probably the sweet spot.”


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