AM Best has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” of ZEP-RE (PTA Reinsurance Company) (ZEP-RE) (Kenya).
The outlook of these Credit Ratings (ratings) is stable.
The ratings reflect ZEP-RE’s balance sheet strength, which AM Best categorises as very strong, as well as its strong operating performance, neutral business profile and marginal enterprise risk management.
ZEP-RE’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). Risk-adjusted capitalisation benefits from a relatively prudent investment allocation and low underwriting leverage. The ratings also consider the company’s significant exposure to the high economic, political and financial system risks associated with Kenya and the company’s other important operating markets.
ZEP-RE has a track record of strong operating performance over the longer term, despite challenging market conditions, evidenced by its five-year (2015-2019) weighted average return on equity (ROE) of 9.4%. AM Best notes that ROE should be viewed in the context of ZEP-RE’s reporting currency, the U.S. dollar, which somewhat limits the impact of the high local inflation on the company’s reported net income.
Over the cycle, the company has demonstrated solid non-life underwriting performance, posting a five-year (2015-2019) weighted average combined ratio of 96.3%. However, underwriting results deteriorated in 2018 and 2019, with non-life combined ratios of 100.3% and 100.6% (as calculated by AM Best), respectively.
Although underwriting performance is expected to improve over the medium term as the company withdraws from unprofitable business, 2020 is likely to be another challenging year, with a marginal underwriting result.
ZEP-RE operates as a composite reinsurer across Africa, with a focus on markets in East Africa. The company’s competitive position benefits from access to mandatory cessions in a number of its sub-Saharan Africa member states.
ZEP-RE’s enterprise risk management framework is considered to be suitable given the size and complexity of its operations. AM Best notes that in recent years the company has taken steps to implement tools to reliably manage its risk exposures.
However, a deterioration in local market conditions, and consequently, ZEP-RE’s operating performance, highlights the need for further development of underwriting risk management capabilities.