Johannesburg, 31 July 2018 — 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 July 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to ZEP-Re (PTA Reinsurance Company) (“Zep Re”) based on the following key criteria:
Zep Re’s capitalisation is robust, supported by a 24% average annual growth rate in capital over the review period. Growth was supported by capital injections and sound internal capital generation. As such, capital amounted to USD228m at FY17 (FY16: USD199m), which is viewed to more than adequately cater for medium term growth strategies. The international solvency margin equated to a very high 199% at FY17 (FY16: 190%; review period average: 165%), and is expected to remain within a very strong range over the outlook horizon. Therefore, risk adjusted capital adequacy is likely to remain resilient over the rating horizon, supported by the sizeable capital base, while the adoption of an internal capital model could further mitigate solvency risks over the longer term.
Liquidity was maintained at very strong levels, largely supported by high cash buffers from successive capital injections. Accordingly, cash equivalents and interest securities covered net technical liabilities and average monthly claims by 2.3x (FY16: 2.7x) and 31 months (FY16: 32 months) respectively. GCR expects liquidity metrics to remain at very strong levels, comfortably tolerating cash demands from regional participations.
Zep Re displays an above average competitive position that is supported by a well-entrenched market position and comparatively strong premium growth to peers. The reinsurer has an aggressive long term growth plan that seeks to enhance market share in eight existing markets. In this regard, gross premium growth has consistently exceeded that of the peer group over the review period (averaging 13% vs. 3% for peers), supported by strong brand and mandate recognition, long standing market relationships, and relative strengthening in risk assumption capacity.
Competitive technical performance supported earnings capacity at a strong level over the review period, while improving operational efficiencies could result in earnings consolidation over the medium term. The reinsurer’s technical margin differential to the peer group averaged four percentage points over the review period and widened to 10 percentage points in FY17, albeit with the review period underwriting margin equating to 6.1%, compared to the peer group’s 7.5% (FY17: 8% vs. 4%), partly due to a one-off step-up in staff related costs. In this regard, the underwriting margin could stabilise at current levels, reflecting ongoing cost moderation efforts, coupled with expected scale efficiencies. Furthermore, earnings capacity receives substantial support from a sizeable investment portfolio. Although credit impairments are a source of earnings risk over the rating horizon, GCR expects the bedding down of risk management structures to protect earnings over the longer term.
Zep Re’s earnings profile is strong, supported by a sizeable revenue base and well-diversified exposure to lines of business, albeit offset by high single market exposure, with Kenya accounting for 42% of gross premiums in FY17 (FY16: 37%). In this respect, risk to revenue is viewed to be moderately low, with an active drive to deepen market presence potentially supporting an enhanced earnings profile over the medium term.
Retrocession counterparties reflect strong credit profiles, with 95% (FY17: 76%) of counterparties displaying international scale ratings in the ‘A’ band or higher. Furthermore, maximum net deductibles per risk and event are limited to levels that are conservative.
The reinsurer’s stand-alone credit profile derives upliftment from shareholder support. In this respect, the four largest shareholders reflect solid financial strength, while continuing financial support from sovereign shareholders is deemed to be expressed through tax exemptions.
Upward rating movement could arise from a strengthening of the shareholder profile or a sustained and material improvement in either profitability or competitive positioning. Conversely, a significant deterioration in earnings capacity or a material weakening in shareholder composition may result in negative rating action.
| NATIONAL SCALE RATINGS HISTORY |
| Initial rating (December 2015) |
| Claims paying ability: AA+(KE) |
| Outlook: Stable |
| Last rating (August 2017) |
| Claims paying ability: AA+(KE) |
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst |
| Godfrey Chingono |
| Senior Credit Analyst |
| (011) 784 – 1771 |
| godfreyc@globalratings.net |
| Committee Chairperson |
| Yvonne Mujuru |
| Sector Head: Insurance Ratings |
| (011) 784 – 1771 |
| ymujuru@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
Kenya Short Term Insurance Industry Bulletins, 2014-2017
ZEP-Re (PTA Reinsurance Company) rating reports, 2015-2017
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/RATING-SCALES-DEFINITIONS. 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 rating were influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was 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 rating has 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 rating included:
- The 2017 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- Actuarial report for year ended 31 December 2017
- Current year retrocession summary
- Other related documents.
The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
| 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 more detailed glossary of terms, please click here
GCR affirms ZEP-Re’s (PTA Reinsurance Company) rating of AA+(KE); Outlook Stable.
