Johannesburg, 29 Nov 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to ZEP-Re (PTA Reinsurance Company) at AA+(KE), with the Outlook accorded as Stable. The rating is valid until November 2017.
Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating at BBB-, with the Outlook accorded as Negative. Simultaneously, the international scale claims paying ability rating has been withdrawn at the request of the client. Therefore, GCR will no longer provide analytical coverage of an international scale rating for Zep Re.
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 reflects very strong risk adjusted capitalisation, underpinned by a sizeable capital base (USD195m as at September 2016), catering for the quantum of insurance and market risk exposures. In this respect, the international solvency margin equated to a very high 195% at 3Q F16 (FYE15: 146%; FYE14: 136%). GCR expects risk adjusted capitalisation to remain within a very strong range over the rating horizon, supported by sound internal capital generation, as well as well contained dividend distributions.
The reinsurer has a large investment portfolio, covering capital and net technical provisions (which have been independently assessed and deemed sufficient) by 1.3x and 2.5x respectively at FYE15. The reinsurer employs a conservative investment approach, supportive of very strong liquidity metrics. In this respect, cash coverage of net technical provisions equated to 2x (FYE14: 1.8x), while claims cash cover registered at 35 months (FYE14: 33 months). GCR expects liquidity metrics to remain at very strong levels, supported by sound cash flow generation and conservative asset allocation.
Earnings capacity is viewed to be strong, underpinned by healthy underwriting profitability and sizeable investment income. In this respect, the reinsurer’s five year aggregate underwriting margin equated to 6%, while the operating margin averaged a strong 18% over the review period. Cognisance is taken of the improved underwriting results achieved over the last three years relative to the start of the review period. GCR expects earnings capacity to register at strong levels, albeit with large event-driven fire losses and attritional losses from the medical and casualty accounts continuing to represent moderate profit risks.
Zep Re’s business profile is strong, supported by its favourable strategic position on the African continent, and fairly well diversified earnings stream. The reinsurer benefits from local and regional mandatory cessions and tax exemptions in the countries where it is recognised as a local reinsurer. Furthermore, earnings are fairly spread across different geographic locations, and lines of business. In this respect, risk to revenue is viewed to be fairly limited.
The reinsurer’s competitive position is viewed to be sound, underpinned by the sizeable capital base relative to other regional players. In GCR’s view, competitive positioning may strengthen over the medium to long term, supported by substantial capital growth, in conjunction with product development, strong brand recognition and long standing relationships with clients and shareholders.
Zep Re’s retrocession counterparties reflect strong credit profiles, with the majority displaying international scale 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.
The international scale claims paying ability rating is a function of Kenya’s sovereign rating, which was impacted by negative rating action. Sovereign risk exposure stems from the fact that the majority (68%) of the reinsurer’s invested assets are domiciled locally, and approximately a third of revenues are derived domestically.
The reinsurer’s stand-alone credit profile derives upliftment from shareholder support. In this respect, the four largest shareholders reflect moderately strong aggregated international scale credit strength.
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 may result in negative rating actions.
| 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 |
ANALYTICAL CONTACTS
| Primary Analyst | Committee Chairperson | |
| Yvonne Masiku | Marc Chadwick | |
| Senior Credit Analyst | Sector Head: Insurance Ratings | |
| (011) 784-1771 | (011) 784-1771 | |
| ymasiku@globalratings.net | chadwick@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Criteria for Rating Long Term Insurance Companies, updated July 2016
East Africa Insurance Statistics Bulletin, 2007-2015
ZEP-Re (PTA Reinsurance Company) rating report, 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 ratings.
The information received from ZEP-Re (PTA Reinsurance Company) and other reliable third parties to accord the credit ratings included:
- The audited annual financial statements to 31 December 2015 Four years of comparative numbers
- Unaudited interim results to 30 September 2016
- Budgeted financial statements for 2016
- 2016 retrocession cover notes
- 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.
| 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. |
| Cash | Funds that can be readily spent or used to meet current obligations. |
| 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. |
| Distribution Channel | The method utilised by the insurance company to sell its products to policyholders. |
| Enterprise Risk Management | ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level. |
| 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. |
| International Scale Rating (“ISR”) | International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions. |
| Intermediary | A third party in the sale and administration of insurance products. |
| Interest | Money paid for the use of money. |
| Investment Portfolio | A collection of investments held by an individual investor or financial institution. |
| Liquidity | The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. |
| 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”) | National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss. |
| Policyholder | The person in actual possession of an insurance policy. |
| Portfolio | All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business. |
| Premium | The price of insurance protection for a specified risk for a specified period of time. |
| Rating Horizon | The rating outlook period |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Risk Management | Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy. |
| Short Term | Current; ordinarily less than one year. |
| Solvency | With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities. |
| Statutory | Required by or having to do with law or statute. |
| Subordinated Debt | Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt. |
| 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. |
| Underwriting Margin | Measures efficiency of underwriting and expense management processes. |
For a detailed glossary of term please click here
GCR affirms ZEP-Re’s (PTA Reinsurance Company) rating at AA+(KE); Outlook Stable.
