Fitch Ratings has affirmed African Guarantee Fund for Small and Medium-sized Enterprises Ltd.'s Insurer Financial Strength Rating (IFS) at 'AA-'.
The Outlook is Stable.
The rating balances AGF's very strong capitalisation and conservative investments with weak financial performance, as well as expected financial support from shareholders.
Key Rating Drivers
Ownership Positive for Rating: Fitch expects shareholders would provide financial support to AGF in case of need. Accordingly, the IFS Rating is notched up two levels from AGF's Standalone Credit Profile. Fitch believes AGF is a very important vehicle to execute and realise the development goals of its sponsoring organisations. However, Fitch does not equalise AGF's rating with its shareholders' to reflect that financial support is not formal and barriers to support potentially exist as shareholders are exclusively government-related entities.
'Very Strong' Capitalisation: Fitch assess AGF's capitalisation and leverage as 'Very Strong' based on an end-2021 Fitch-calculated net par/capital ratio of 0.9x (2020: 1.2x) benchmarked for a high-risk portfolio with currency risks and no financial leverage. AGF is not subject to capital regulations. Fitch expects the net par/capital ratio to increase driven by business growth but to remain below 2x.
High-Risk Guarantee Portfolio: The guarantee portfolio is entirely non-investment grade with recovery rates typically below 10%. Exposure is fairly well-diversified across African countries although the top five countries (mainly located in central and east Africa) accounted for about 50% of net par, which reduce diversification benefits and increase risk correlations. However, in Fitch's view, the contractual terms of guarantees significantly reduce the risk of credit losses to AGF as reflected in a historically very low claims ratio across all products.
Low Investment Risk: Fitch regards AGF's investment policy and liquidity-risk management as conservative, which we expect to be maintained. The majority of investments are bonds with strong international credit ratings (on average within the 'A' category), mainly consisting of global government or government related entity bonds. Other invested assets are cash, short- and long-term deposits held with western African banks with expectedly no deposit insurance in case of default.
Prudent Credit Loss Reserving: Fitch views AGF's credit loss-reserving practices as firmly established, supported by both internal-risk assessment processes and external input. In 2020 and 2021 reserve development to net revenue was unfavourable due to credit deterioration caused by the coronavirus pandemic.
Weak Profitability: AGF's objective is to realise the development agendas of its sponsoring institutions. Accordingly, it does not have a return on equity (ROE) target and its profitability is weak. However, its activities should remain profitable in the long term to preserve its capital and to sustain its operations. Earnings have been under pressure in recent years (2021 ROE: -3%, 2020 ROE -6.2%) driven by economic deterioration caused by the pandemic. However, with improving economic conditions, expected credit loss reserves could be partially released in coming years while earnings stabilise.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Formal support agreement(s) provided to AGF by its shareholders
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A reduction in shareholders' commitment to AGF, possibly as a result of a change in government- policy priorities
The net par/capital ratio exceeding 2.5x
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
ALLIANZ SE 
