Announcements Insurance Rating Alerts

GCR revises ZEP-Re (PTA Reinsurance Company)’s national scale financial strength rating to AAA(KE) on criteria change; Outlook Stable

Rating Action

Johannesburg, 11 December 2019 – GCR Ratings (“GCR”) has revised ZEP-Re (PTA Reinsurance Company)’s (“Zep Re”) national scale financial strength (formerly claims paying ability) rating to AAA(KE), Stable Outlook, from AA+(KE), Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
ZEP-Re (PTA Reinsurance Company) Financial strength National AAA(KE) Stable Outlook

GCR announced that it had released new criteria for rating supranational institutions in May 2019. Consequently, the rating for Zep Re was placed ‘Under Criteria Observation’. GCR finalised the review for Zep Re under the released Criteria for Rating Supranational Institutions, May 2019. As a result, the rating for Zep Re has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

Zep Re’s national scale financial strength rating is a function of its exposure to comparatively riskier markets, counterbalanced by support through preferential treatment and healthy membership strength and diversity. The reinsurer’s mandate is fairly strong, given its position as an established reinsurer within the Common Market for Eastern and Southern Africa (“COMESA”) region, noting potential for improvement in status and diversity. Furthermore, GCR views the financial profile to be sound, supported by solid capitalisation and strong liquidity, somewhat offsetting inherent earnings pressures.

The operating environment assessment is partially diluted by the reinsurer’s geographical exposure to relatively riskier sovereigns, in line with its mandate. This notwithstanding, Zep Re’s credit profile derives uplift from a fairly diversified membership base, coupled with continued preferential treatment in the form of mandatory cessions and tax exemptions.

Zep Re is the largest supranational reinsurer focused on the COMESA region, with gross premiums sourced from more than six significant markets (Kenya accounting for a majority 40% of gross premiums). In terms of the business mix, two lines of business contribute materially to net premiums. The reinsurer has a demonstrated track record of shareholder support through capital injections, supporting its “1 Believe” vision. In addition, the business profile is also supported by a fairly strong mandate, with the reinsurer building a good track record in providing sound reinsurance capacity and insurance skills development in the region.

The reinsurer’s very strong risk adjusted capitalisation is viewed as a key rating strength. Zep Re registered a five year compound annual growth rate (“CAGR”) of 13% in capital base, supported by sound internal capital generation and capital raises over the review period. As such, capital amounted to USD230m at FY18 (FY17: USD228m), which is viewed to more than adequately cater for medium term growth strategies. Going forward, the sizeable capital base is likely to sustain risk adjusted capital adequacy at a similar level over the outlook horizon. Furthermore, the financial profile is supported by strong liquidity. In this respect, cash and stressed financial assets covered net technical liabilities by 2.4x and operational requirements by 20 months at FY18 (FY17: 2.5x and 25 months).

Earnings are viewed to be intermediate, evidencing a level of volatility. In FY18, Zep Re registered an underwriting deficit, driven by higher claims experience on the back of increased frequency of medium-sized claims as well as an increase in foreign exchange losses. GCR expects earnings to remain exposed to market related risks, given weaknesses in target markets. Positively, the reinsurer’s retrocession protection is viewed to somewhat mitigate a degree of earnings volatility.

Outlook Statement

The Stable Outlook reflects expectations that the reinsurer will maintain very strong capitalisation, strong liquidity and intermediate earnings. Furthermore, we also expect that the reinsurer will continue to gradually build its status in target markets over the medium term, while the business profile is not expected to change materially over the outlook horizon.

Rating Triggers

The national scale financial strength rating is at the rating ceiling.  Downward rating pressure could follow from a material deterioration in credit protection metrics, and/or if there are evidence of diminishing preferential treatment.

Analytical Contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Secondary analyst Siyuan Lu Associate Analyst
Johannesburg, ZA SiyuanL@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Supranational Institutions, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, June 2019
GCR Insurance Sector Risk Scores, November 2019

Ratings History

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National AA+(KE) Stable December 2015
Last National AA+(KE) Stable July 2018

Risk Score Summary

Risk scores ZEP-Re (PTA Reinsurance Company)
Operating environment 13.50
Country risk score 3.75
Sector risk score 3.75
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 20.00

Glossary

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.
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.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Technical Liabilities The sum of Net UPR and Net OCR IBNR.
Underwriting Margin Measures efficiency of underwriting and expense management processes.
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.

SALIENT POINTS OF ACCORDED RATING

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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to ZEP-Re (PTA Reinsurance Company). 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.

ZEP-Re (PTA Reinsurance Company) participated in the rating process via face-to-face 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 ZEP-Re (PTA Reinsurance Company) and other reliable third parties to accord the credit rating included:

  • The audited financial results up to 31 December 2018
  • Four years of comparative audited numbers to 31 December
  • Unaudited interim results up to 30 June 2019
  • Budgeted financial statements to 31 December 2019
  • Other related documents.
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