AM Best has upgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “bbb” (Good) and affirmed the Financial Strength Rating of B++ (Good) of ZEP-RE (PTA Reinsurance Company) (ZEP-RE) (Kenya). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect ZEP-RE’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The upgrading of the Long-Term ICR reflects AM Best’s revision of ZEP-RE’s ERM assessment to appropriate from marginal, following management’s actions to strengthen its risk management capabilities. In recent years, the company has taken robust steps to improve its underwriting results, whilst also reducing its exposure to investment risk. AM Best considers ZEP-RE’s risk management framework to be appropriate given the size and complexity of its operations, as its risk management capabilities are closely aligned with its risk profile.

ZEP-RE’s balance sheet strength is underpinned by a risk-adjusted capitalisation that is comfortably at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), benefiting from a prudent asset allocation and low underwriting leverage. The ratings consider ZEP-RE’s exposure to high levels of economic, political and financial system risks, which are associated with operating in its core Eastern, Southern and West African markets. However, this is partially mitigated by ZEP-RE’s good geographic diversification by countries in Africa and a conservative asset management strategy. Investment risk reduced materially in 2022 and 2023, with the reallocation of funds from African deposits and debt instruments to U.S. government debt instruments.

ZEP-RE has a strong operating performance assessment. The company reported a five-year weighted average return-on-equity ratio (ROE) of 7.2% (2018-2022). AM Best notes that ROE should be viewed in the context of ZEP-RE’s reporting currency (USD), which somewhat limits the impact of high inflation in many African markets on the company’s reported net income, as well as its high levels of capitalisation. After having reported technical losses from 2018 to 2020, ZEP-RE reported technical profits in 2021 and 2022, with a combined ratio of 97% in both years. The company’s underwriting performance is expected to remain favourable in the short-to-medium term as a result of remedial actions taken by management.

ZEP-RE operates as a composite reinsurer across Africa, with a focus on countries of the Common Market for Eastern and Southern Africa (COMESA), as well as the Conférence Interafricaine des Marchés d’Assurances (CIMA) regions. The company’s competitive position benefits from mandatory cessions in a number of sub-Saharan African countries. With good long-term growth prospects, premium revenue is expected to continue to expand in local currency terms as primary markets develop.

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