AM Best Affirms Credit Ratings of ZEP-RE (PTA Reinsurance Company)

LONDON--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” (Good) 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 assesses as very strong, as well as its strong operating performance, neutral business profile and marginal enterprise risk management (ERM).

ZEP-RE’s balance sheet strength is underpinned by risk-adjusted capitalisation that is comfortably at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), benefiting from a prudent asset allocation and low underwriting leverage. Prospective risk-adjusted capitalisation is expected to be supported by strong organic capital generation. The ratings consider ZEP-RE’s significant exposure to the high levels of economic, political and financial system risks that are associated with operating in the company’s core East, Southern and West African markets. However, this is partially mitigated by ZEP-RE’s good geographic diversification and conservative asset management strategy.

ZEP-RE has a strong operating performance assessment. The company reported a five-year weighted average return on equity (ROE) of 8%. AM Best notes that ROE should be viewed in the context of ZEP-RE's reporting currency (USD), which somewhat limits the impact of high inflation in many African markets on the company's reported net income, as well as its high levels of capitalisation. Recent underwriting performance has been below AM Best's expectations, demonstrated by a five-year (2017-2021) combined ratio of 98%. As a result, management has taken a number of corrective actions to improve underwriting profitability, which are expected to support strong operating performance over the underwriting cycle.

ZEP-RE operates as a composite reinsurer across Africa, with a focus on countries of the Common Market for Eastern and Southern Africa and the Conférence Interafricaine des Marchés d’Assurances regions. The company’s competitive position benefits from mandatory cessions in a number of sub-Saharan African countries. With good long-term growth prospects, premium revenue is expected to continue to expand in local currency terms as primary markets develop.

AM Best considers ZEP-RE’s ERM framework to be suitable given the size and complexity of its operations. Notwithstanding this, a deterioration in local market conditions, and consequently, ZEP-RE’s operating performance, highlights the need for further development of underwriting risk management capabilities. AM Best notes that in recent years the company has taken robust steps to improve future underwriting results and reliably manage its risk exposures; however, it is too soon to assess if these steps have had a material and sustained impact on results.

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