Sub-Saharan Africa is generating significant demand to underwriters in political risk insurance (PRI) markets, which have shown some strong appetite in the face of considerable challenges, writes Kevin Godier.
The scene is set by James Cunningham, head of Marsh’s political risk broking team in London, who underscores “a steady increase in demand for trade and investment risks in Sub-Saharan Africa over the last 12 months”. Although the actual amounts in US dollars remain relatively small when compared to other regions, “we have noticed, in particular, an increase in demand relating to ‘south to south’ business between China/India and countries in Sub-Saharan Africa,” he says.
Demand has covered “numerous areas, such as PRI for stocks, mining projects, and import/export financing,” comments Thomas Holmes, associate director, at the London office of brokerage Miller Insurance Services.
In particular, high commodity prices “have until quite recently driven mining and oil and gas companies to look at ‘new’ countries that they would previously not have bothered with”, according to Charles Keville, senior political risk underwriter at Atradius in London. “Thus we saw an increase in the requests for covering those investments against CEN (confiscation, expropriation and nationalisation) and PV (political violence),” he says.
“Although in our experience a surprisingly large number of equity investors choose to self-insure these risks, PRI coverage of bank debt in African resource projects is extensive,” says Roger Donnelly, chief economist at Australia’s Export Finance and Insurance Corporation (EFIC), which, among other African projects, provided PRI and debt finance for the Lumwana copper mine development in Zambia in 2006.
The uptake in cover has burgeoned in tandem with a perceived increase in democracy, stability and better security in many Sub-Saharan countries, Keville observes. “The overall improvements in stability and security have led to increased appetite from insurers, although not necessarily more capacity,” he says.
“Africa continues to be a source of growth in the credit and political risk insurance (CPRI) market,” agrees Alastair Mole, head of political risks at Benfield. Although Mole acknowledges that factors such as high collateralisation, underlying financial strength and sustainable commercial viability have played a key role in the underwriting decision-making process in emerging markets, including Sub-Saharan Africa, the result, he says, are “very good quality risks which are extremely resilient to external market forces”.
Holmes argues that several strong years of GDP growth across Sub-Saharan Africa “seem to have had a beneficial effect on the stability of the region”. He says that Miller Insurance Services “has seen more open account payments as the buyers have become more sophisticated, although the use of collateral management agreements are still prevalent for import and export financing activity.”
“New people are competing for African business as certain transactions are seen as relatively safe and secure in comparison to credit risks in some other emerging markets at present – there is increasing support for those risks that have a good track record of meeting payment terms,” emphasises Elizabeth Stephens, head of credit and political risk analysis at JLT Risk Solutions.
One example of where insurers are viewing the market favourably is the mining sector, she says. “In Congo and Zambia, mining contracts have recently been re-signed. Insurers view this as a favourable step as it has been an inclusive consultation process involving stronger, amalgamated mining companies.”
Stephens believes that the global financial contagion has been felt less in Africa than in most other areas of the world. “Given the low starting base for Africa and the residually high risk environment, I think it is fair to say that the credit crisis has had relatively little impact to date in Sub-Saharan Africa. From the credit perspective the region has held its own. Pricing has stayed the same post-credit crunch which implies an improvement relative to increases in pricing for some other countries.”
Another possible attraction for insurers, flagged up by David Evans, director, political, project and credit risks at Gallagher London, is that “potentially there are more pure political risk exposures in Africa, rather than perhaps currently less reliable credit risk on private obligors”.
However the ongoing global slowdown will inevitably increase risk levels for insurers active in the market, predicts Andrew Atkinson, country risk analyst at credit insurer Euler Hermes UK. “Before the global credit crisis, Sub-Saharan Africa was generating its best growth for a long time, within the 5-7% average annual growth bracket, which was accompanied by lower debt, higher foreign exchange reserves and sounder policies in most of the area’s major countries,” he highlights.
Atkinson adds that “Africa has been fairly resilient to the first wave of impact from the crisis, because its banking systems are less integrated in global financial markets. However the region will be hit by the global economic slowdown, reducing the demand for African commodities and other goods, which will hit local exporters,” he forecasts.
“2008 had been a good year for Africa till the world financial system started to crumble,” suggests Rizwan Haider, regional manager, Sub-Saharan Africa, within Export Development Canada’s (EDC) international business development group.
Haider cites two major events for EDC during the year, a US$300mn participation in the Ambatovy Nickel Mining project in Madagascar, plus an agreement with Angola’s Banco Poupanca y Credito to provide financing for projects undertaken by Canadian companies for up to US$1bn.
On a gloomier note, “we have noticed that a solid export finance proposition that might have previously taken one month to close tends to take far longer in these tough times”, says Stewart Kinloch, chief underwriting officer, at the Nairobi-based African Trade Insurance Agency (ATI). “For quality business the appetite of our reinsurers and co-insurers remains, albeit that the price may be slightly higher,” he adds.
The commodities sector has played a pivotal role in what Jerome Swinscoe, senior underwriter at HCC Service Company, the London unit of Houston Casualty, terms as “a wide ranging stream of demands for Sub-Saharan Africa so far this year”. He notes that requests have spanned “the usual oil-related transactions, either involving coverage against risks of non-delivery of crude/oil products for oil producing countries, to coverage for non-payment risks for countries which are importers of oil, to demand for confiscation type coverage for stocks of soft commodities such as rice, in particular earlier in the year when the spike in food products caused concerns around the world and in Africa in particular.”
“The medium-term Sub-Saharan deals that we focus on tend to be resource-related, on the export side,” says Bernard de Haldevang, head of financial and political risk at Aspen Insurance UK, underlining the improved fiscal position of markets such as Angola and Nigeria. “Net oil importers have been feeling some balance of payments pain, but many banks have taken the view that they should carry on financing these countries, rather than cause their demise. We have tended to steer clear.”
Markets here could include Cote d’Ivoire, Senegal, Mali and Guinea, all of which draw in “deliveries of refined products to the state-owned oil entity”, says Atradius’ Keville.
Demand for PRI in Sub-Saharan Africa “continues to be driven primarily by oil and gas financing,” comments Mole. “It is true that commodity prices in this sector have dropped significantly – however, the returns to lenders, even at current prices, are still significant.”
One reason why oil-related transactions remain popular with underwriters is that “countries need oil and always find a way to pay – Ethiopia for example has never defaulted on an oil trade agreement,” elaborates Stephens.
She adds: “Most popular transactions are based on an underlying commodity and are short term on revolving credit facilities of 30-90 days for one year uncommitted. However, for the right counterparties and the right structure some insurers are willing to write sizeable lines – perhaps as much as US$30mn over five years.”
Another continued demand source, adds Swinscoe, is for “contract frustration policies in respect of various infrastructure projects in telecoms, roads, power plants and so on, which are needed throughout the whole of Africa.”
In terms of countries that figure most regularly in transactions, Holmes singles out “Angola, Zambia, Mozambique, and anywhere with commodities”.
Nigeria continues to be in high demand across all sectors, according to Evans. “We see the odd enquiry now for Chad, following their oil find. We’ve also seen a few more enquiries recently for political violence and war in Congo (Brazzaville) and there is a high demand in the market for Cote d’Ivoire, again mainly oil related.”
De Haldevang observes that “the market is pretty full on Angola, which has further pushed up the pricing, but it’s still an extremely good risk, in our opinion”. Ghana “will also be a good story,” he adds. “We have already seen a few reserves-based lending enquiries for Ghana, but so far turned them down because the borrowing base basics didn’t meet our expectations.”
Swinscoe points to “a lot of deals done in Angola, as well as Nigeria, where a stronger domestic banking sector has provided an incentive for underwriters to consider taking risks on letters of credit issued by Nigerian banks.”
To the east, “Ethiopia managed to gather a bit of interest from the market”, but demand on South Africa has been “relatively limited”, while Sudan remains the target of US sanctions and cannot be considered by companies such as HCC, he stresses.
Angola and Nigeria are also flagged up as “the most active during the past year” by Price Lowenstein, president at Bermuda-based Sovereign Risk Insurance. “We anticipate that this trend will continue into 2009,” he observes, adding that “along with most other large PRI underwriters, we are getting very tight on capacity in these two markets, reflecting the volume of trade and investment going in.”
In terms of new trends, Lowenstein comments that “Gabon may be a market where we see greater activity next year, but with the movement in oil prices, it’s a little hard to predict.” Cote d’Ivoire and Democratic Republic of Congo (DRC) also “represent significant market accumulations today,” says Mole.
A similar market sweep is indicated by Ian Henderson, Texel Capital’s African specialist. “The focus of the banking markets has been on Nigeria and Angola. There was a huge demand for credit cover for letter of credit (LC) confirmations for Nigerian banks – and lots of capacity was taken up over the first six-to-nine months, much of it in the Lloyd’s and private markets. Pricing has increased by around 1% over the 10 months, and now the market has gone quiet, with underwriters electing to sit at that rate and liquidity constraints in the Nigerian FI sector,” he says.
Interest from banks has switched to the new Sonangol deal, for which “some insurance capacity has been tapped,” says Henderson. Elsewhere, “demand in the last three months for Zambian and DRC mining and power projects has tapered off, as banks wait for the outcome of elections, however small pockets of business are still seen for Ghana and Gabon,” he adds.
Beyond these markets, cover on local issuing banks is sometimes required for Benin, Cameroon, Equatorial Guinea and Togo for various food and related products, or for CEN + PV cover on the stocks, notes Keville.
Atradius also receives requests for “small infrastructure projects in Burkina Faso,” he adds. “Our underwriting policy is generally to focus on some strategic contracts for those countries or contracts that are benefiting from financings by multilaterals or other international financing entities,” he says.
From Botswana to Zimbabwe
These comments all bear witness that treating Sub-Saharan Africa as a single, homogenous region makes little sense from a PRI viewpoint. “The market has had losses in the region and some generally decline any Sub-Saharan business, and it is probably an area where people are slightly less inclined to draw distinctions between the different types of countries,” contends de Haldevang.
As an example, he highlights Botswana and Zimbabwe. “One is right up at the top of the Transparency International rankings and the other down at the foot. They are obviously very different, yet some people may not take that into account. You need to look at each country, and its issues, very closely.”
Stephens agrees, commenting that “headlines highlighting trouble in one country are sometimes interpreted as trouble in Africa which overlooks the differences between the countries”.
The region’s risks are of course very real, not least in the DRC, where spreading rebel army activities in the east have alarmed analysts. “We are seeing declinatures in countries where there are political problems, such as Congo,” says Stephens, while de Haldevang admits that “we have been nervous, and are now doubly nervous” about the DRC. “We have avoided most mining sector risks in the higher-risk areas in Sub-Saharan Africa, partly because of pricing, and have avoided DRC so far, but we are aware of quite a lot of DRC exposure in the market.”
He comments: “There are some fundamental uncertainties that affect the continent, including some highly debilitating factors not reproduced anywhere else in the world. You cannot ignore events in Sudan, Zimbabwe or the DRC, or the Horn of Africa, where you have conflicts and terrorism that is beyond the control of governments and of the international community, and in the case of Somalia is forcing ship-owners to route their vessels via the Cape.”
Further negative potential is offered by a spate of elections across Africa during the next 18 months, with the current uncertainty in South Africa, where Jacob Zuma remains in line for the presidency, leading the worry list, says de Haldevang. This point is picked up by Atkinson at Euler Hermes, who asks: “Will policies stay on track, or shift to the left and new forms of populism?”
Atkinson notes that the ruling ANC party may be splintering, “which could bring a strong new opposition bloc, which is positive in the long run, but it is happening at an inopportune time”.
Atkinson nonetheless argues that Sub-Saharan Africa, “on balance, has a far greater political stability than 10 years ago, with more states playing the democracy card”.
One worry, he says, is that “if an economic downturn hits the more fragile states, some of the political gains could be eroded, and domestic security tightened up, which would be a negative development.
With regard to the DRC troubles, he emphasises that “although the mainly western-based economy is somewhat sheltered from events on the eastern border, Burundi and Rwanda are involved in the turmoil, suggesting the risks are sub-regional.” East Africa’s problems also encompass regional giant Kenya, now “weakened from the political problems in early 2008, which have hit the economy”, Atkinson adds.
Significant volumes of African political risks are also written by export credit agencies (ECAs). Italy’s Sace set up on the ground in Johannesburg in 2008 to boost its reach into the southern African region, while the multilateral African Trade insurance (ATI) has been operating in Kenya since 2001, subsequently issuing insurance policies covering political and commercial risks covering transactions worth in excess of US$670mn as part of its mandate to facilitate, encourage and develop trade, investments and other productive activities in Africa.
“We are seeing increasing demand in telecommunications across a number of Sub-Saharan countries,” says Kinloch, noting that demand is particularly strong for infrastructure works as operators try to expand their networks.
Sub-Saharan telecoms is also a key focus for European ECAs such as Belgium’s Office National Du Ducroire (ONDD) and Sweden’s EKN (Exportkreditnamden), the latter having shown up in recent transactions in a few countries across the region. “Banks and exporters are trying to make the most of us in some really interesting markets,” says Ove Nyström, the Swedish agency’s senior underwriter, telecoms, who specialises in the Middle East and Africa.
US Ex-Im boost
US Ex-Im Bank, for its part, is heavily focused on power transactions, and has backed power transactions in Ghana and Benin in 2008, observes director Joseph Grandmaison – the bank’s board member who is responsible for promoting exports to the region.
“Power is our most active sector in Sub-Saharan Africa,” Grandmaison says, pointing to a US$344mn guarantee mobilised in August for a rural electrification contract in Ghana.
In particular, US Ex-Im’s board is “pleased with how Nigeria is going”, he says, referring to its Nigerian bank facility, on which the limits were more than doubled to US$1bn in June 2008.
In terms of competition from other ECAs, three agencies stand out, says Grandmaison. “In French-speaking Africa, a relationship mindset often prevails, and Coface is at an advantage. The Dutch have also gone head to head with us in a particular sector, but generally speaking we are competitive in more African countries than any of our competitors – except China.”
In addition to its Madagascan and Angolan moves, EDC has seen robust demand for “a range of South African risks – in mining, energy, railways, construction, telecoms and transportation – as well as Nigeria, Tanzania, Kenya, Botswana and Ghana,” says Haider.
Responding to violence
An innovative move – described by Kinloch as “perhaps the most groundbreaking of all at ATI” – has been the agency’s response to the political violence that hit Kenya back at the start of 2008. In September 2008, ATI made the landmark announcement that it would assist the insurer UAP Insurance Company to offer insurance against civil disturbance to its clients, enabling Kenyans to access, for the first time, insurance against damage resulting from PV.
Says Kinloch: “PV is normally an excluded cause of loss in insurance – and as a result, many Kenyan insurance companies either denied claims, or paid but were unable to recover from their reinsurers.”
ATI’s chief executive Peter Jones stresses that “the new product will have a direct and positive impact on the willingness of the financial sector to continue providing longer-term lending, in particular in the provision of lending products to SMEs, which is a critical element in the ongoing economic recovery efforts.”
In addition to ATI, Africa Re and East Africa Reinsurance Company also underwrote the transaction locally, with ATI reinsuring itself with Lloyd’s of London underwriting syndicates.