Rating action
Nairobi, 01 December 2020 – GCR affirms PTA Reinsurance Company’s (“Zep Re”) national scale financial strength rating of AAA(KE), with the Outlook maintained as Stable.
| Rated Entity | Rating class | Rating scale | Rating | Outlook/Watch |
| ZEP-Re (PTA Reinsurance Company) | Financial strength | National | AAA(KE) | Stable Outlook |
Zep Re’s rating reflects the insurer’s strong financial profile, market competitiveness and preferential treatment within the COMESA region. Despite the earnings pressures brought about by the COVID-19 pandemic through flat premiums growth and lower investment yields, we expect cross cycle earnings to be supported by operational cost savings and reduced exposure to underperforming markets over the next 12 to 18 months.
The operating environment score balances the reinsurer’s exposure to certain higher risk markets and a level of shareholder concentration with the benefits that it is considered to derive from preferential treatment within its primary markets.
Zep Re’s shareholder base comprises 13 government-owned companies, 2 COMESA organisations, 14 private insurance companies, 2 DFIs and 6 governments (Rwanda, Sudan, Djibouti, Zambia, Kenya and Mauritius). Shareholders who are AAA rated have a 18.6% combined shareholding (African Development Bank and DEG), although the assessment considered a level of concentration to key shareholders, as well as the presence of investors from the quasi-private sector.
Zep Re receives a degree of preferential treatment through tax exemption and mandatory cessions in Kenya, Uganda, Tanzania and Djibouti. In FY19, the reinsurer was granted 10.0% mandatory cessions in DRC, following the liberalisation of the market in FY17, and local reinsurer status in Ethiopia, further entrenching its mandate and status in the region.
GWP grew by 16.3% to USD 207m in FY19. Going forward, Zep Re is shifting focus to key markets due to high loss ratios experienced in some markets. While this is likely to put pressure on premium growth, it is expected to boost future profitability. Three lines of business continue to contribute materially namely, Property (42.7%), Casualty (25.1%) and Medical (12.4%) while life was at 8.4% in FY19. Kenya continues to be a significant market for Zep Re with 42% of the premiums derived from there.
Underwriting profitability increased to USD6m from USD2m in FY18, however, management expenses increased by 37% to USD14m in FY19 due to staff bonuses which were not paid in FY18.
Between FY16 and FY18, investment income growth was almost flat with the income ranging between USD 14.0m and USD 14.4m. FY19 investment income increased to USD 28.9m boosted by fair value gains from the re-valuation of Zep Re Business Park (USD 14.7m) and an almost doubling in dividend income from USD 0.4m to USD 0.7m. FY2020 investment income is likely to be affected negatively by equities fair value losses, lower rental yields, lower dividends as companies preserve cash and lower yields on government securities. We expect FY20 investment income to be lower than that of FY19. Net profitability is expected to drop in FY20 without the revaluations carried out in FY19.
Zep Re’s capital adequacy metrics are strong with the GCR CAR coverage at 3.2x in FY19, although slightly lower than the 3.5x recorded in FY18 due to increased market and short-term risks especially from the property and equities portfolio. The completion of the Zep Re Business Park resulted in the value of investment properties held on the balance sheet increasing to USD50.6m at FY19 from USD27.8m at the end of FY18. Zep Re has accepted an offer for sale on the Zambia property and this should see the ratios rebounding in FY20/21.
Liquidity coverage is strong and remained stable at 2.39x at FY19 compared to 2.36x at FY18 with operational cash coverage at 19.5 months compared to 21.4 months in the previous year.
Outlook statement
The Stable Outlook is premised on the ongoing consolidation in market participation. As such, the balancing of market withdrawal from non-core countries with deepening presence in key markets is likely to support stable operating environment and business profile assessments over the medium term. Furthermore, portfolio cleaning efforts could result in lower earnings volatility, which could support a higher earnings assessment over the medium term. Liquidity and capitalisation factors are expected to measure within the current range.
Rating triggers
The national scale financial strength rating is at the rating ceiling. Downward rating pressure could follow from a material decline in market share, an unexpected decline in liquidity, a worsening receivables position and evidence of diminishing preferential treatment in risky markets.
Analytical contacts
| Primary analyst | Eleanor Kigen | Senior Analyst |
| Nairobi, KE | EleanorK@GCRratings.com | +254 20 3673618 |
| Secondary analyst | Godfrey Chingono | Deputy Sector Head: Insurance |
| Johannesburg, ZA | GodfreyC@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | MatthewP@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Rating Insurance Companies, May 2019 |
| Criteria for Rating Supranational Institutions, May 2019 |
| GCR Ratings Scales, Symbols & Definitions, May 2019 |
| GCR Country Risk Scores, November 2020 |
| GCR Insurance Sector Risk Scores, July 2020 |
Ratings history
Zep Re
| Rating class | Review | Rating scale | Rating class | Outlook/Watch | Date |
| Claims paying ability | Initial | National | AA+(KE) | Stable | December 2015 |
| Financial Strength | Last | National | AAA(KE) | Stable | December 2019 |
Risk score summary
| Rating components and factors | Risk score |
| Operating environment | 13.00 |
| Country risk score | 3.50 |
| Sector risk score | 3.50 |
| Membership strength and diversity | 3.00 |
| Preferential treatment | 3.00 |
| Business profile | 2.00 |
| Status and diversity | 0.00 |
| Mandate and track-record | 2.00 |
| Management and governance | 0.00 |
| Financial profile | 4.50 |
| Earnings | 0.25 |
| Capitalisation | 3.00 |
| Liquidity | 1.25 |
| Callable capital | 0.00 |
| Comparative profile | 0.00 |
| Peer analysis | 0.00 |
| External support | 0.00 |
| Total Score | 19.50 |
Glossary
| Premium | The price of insurance protection for a specified risk for a specified period of time. |
| Provision | The amount set aside or deducted from operating income to cover expected or identified loan losses. |
| Rating Horizon | The rating outlook period |
| Rating Outlook | See GCR Rating Scales, Symbols and Definitions. |
| Recovery | The action or process of regaining possession or control of something lost. To recoup losses. |
| 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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Securities | Various instruments used in the capital market to raise funds. |
| Security | One of various instruments used in the capital market to raise funds. |
| Senior | A security that has a higher repayment priority than junior securities. |
| Spread | The interest rate that is paid in addition to the reference rate for debt securities. |
| Statutory | Required by or having to do with law or statute. |
| Valuation | An assessment of the property value, with the value being compared to similar properties in the area. |
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated party. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the entities and other reliable third parties to accord the credit rating included;
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Unaudited interim results to 30 June 2020;
- Actuarial Valuation Report for 2019; and
- Other relevant documents.
