Johannesburg, 18 Dec 2015 — Global Credit Ratings has today accorded an initial international scale claims paying ability rating of BBB- to ZEP-Re (PTA Reinsurance Company), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has accorded an initial national scale claims paying ability rating to ZEP-Re (PTA Reinsurance Company) of AA+(KE), with the outlook accorded as Stable. The ratings are valid until November 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ZEP-Re (PTA Reinsurance Company) (“ZEP Re”) based on the following key criteria:
Zep Re is a pan-African reinsurer that was created by an agreement of heads of state and government of the Common Market for Eastern and Southern African (“COMESA”) countries in 1990. The reinsurer reflects a favourable strategic position on the African continent, derived from its development mandate and diversified equity participation. Furthermore, the four largest shareholders reflect moderately strong aggregated international scale credit strength.
The reinsurer reflects very strong risk adjusted capitalisation, with robust balance sheet capacity (capital base of USD143m at FYE14) relative to other Sub Saharan players. In this respect, the international solvency margin equated to a high 136% at FYE14 (FYE13: 126%), and is expected to remain at similar levels over the rating horizon. Going forward, GCR expects capital adequacy to remain at very strong levels, supported by sound capital generation, as well as the capital management strategy in place.
Zep Re has a large investment portfolio, covering capital and net technical provisions (which have been independently assessed and deemed sufficient) by 1.4x and 2.4x respectively at FYE14. The reinsurer follows a conservative investment approach, supportive of very strong liquidity metrics. In this regard, invested assets include a sizeable portion of liquid funds (75%), with tradeable equities (6%), and offshore investments (4%), available to offer additional liquidity. GCR expects liquidity metrics to remain at very strong levels, supported by the reinsurer’s investment allocation strategy.
The majority of liquid funds (83%) are denominated in US dollars, with the balance in Kenyan shillings (12%), Sudanese pounds (2%), and various other currencies. The reinsurer’s banking counterparties are fairly well spread (with no single entity holding more than 20% of liquid assets), while being spread across geographic locations, with some liquid funds held in other African countries.
Earnings capacity has evidenced a favourable trend over the last two years, with the reinsurer recording stronger underwriting profitability (2-year average: 7%), compared to prior years (2-year average: 4%). Going forward, management expects margins to remain at strengthened levels, premised on the benefits that are expected to be derived from improving scale, coupled with cost moderation efforts that have been put in place. In GCR’s view, the reinsurer’s earnings capacity is likely to remain at sound levels, although large event-driven fire losses and continuing attritional losses from the medical and casualty accounts may continue to represent moderate profit risks.
Zep Re’s business profile is strong, supported by its favourable strategic position, and fairly well diversified earnings. The reinsurer benefits from local and regional mandatory cessions and tax exemptions in the countries where it is considered a local reinsurer. Furthermore, earnings are fairly spread across different geographic locations, and lines of business. In this regard, risk to revenue is viewed to be fairly limited. Going forward, management expects competitive positioning to strengthen, underpinned by product development, a well-established brand and long standing relationships with shareholders.
Zep Re’s retrocession counterparties reflect strong credit profiles, with the majority displaying ratings in the A band or higher. Furthermore, the maximum net deductibles per risk and event are limited to levels that are considered moderately conservative.
Upward rating movement could arise from a strengthening of the shareholder profile. This would need to be supported by key rating factors pertaining to the reinsurer’s standalone credit profile (in particular, capital adequacy, liquidity, earnings capacity and business profile) being maintained at strong or very strong levels. Conversely, a significant deterioration in risk adjusted capitalisation and/or liquidity metrics could result in negative rating migration. Furthermore, a material weakening in the shareholder composition could lead to a downgrade.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (December 2015)||Initial/last rating (December 2015)|
|Claims paying ability: AA+(KE)||Claims paying ability: BBB-|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Catherine Zimba|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Criteria for Rating Long Term Insurance Companies, updated July 2015.
Criteria for Rating Multilateral Development Banks, September 2015
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ZEP-Re (PTA Reinsurance Company) participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to ZEP-Re (PTA Reinsurance Company) with no contestation of the rating.
The information received from ZEP-Re (PTA Reinsurance Company) and other reliable third parties to accord the credit ratings included:
- The latest available audited annual financial statements up to 31 December 2014
- Four years of comparative audited numbers
- Full year detailed budgeted financial statements for 2015
- Most recent year to date management accounts to 30 September 2015
- The current year retrocession cover notes, and
- Other related documents.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|Interest||Money paid for the use of money.|
|Liquidity||The speed at which assets can be converted to cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||The national scale rating provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||(1) All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. (2) The collection of financial assets constituting an entity’s investment portfolio.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Reinsurance||The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued.|
|Securities||Various instruments used in the capital market to raise funds.|
|Underwriting||The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.|
For a more detailed glossary of terms/acronyms, please click here