A.M. Best has affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating "bbb" 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 A.M. Best categorises as very strong, as well as its strong operating performance, neutral business profile and marginal enterprise risk management (ERM). The company's risk-adjusted capitalisation has strengthened further since year-end 2015, primarily as a result of robust internal capital generation from strong operating performance combined with a pause in growth due to local currency depreciation and lower economic growth in ZEP-RE's regional markets. Technical performance has been maintained, in part due to growth in the proportion of premiums contributed by facultative reinsurance, which has grown to 23% of gross written premium (GWP) in the first half of 2017 from 11% over the same period in 2015. Performance benefits from a good track record of prior year reserve releases.
ZEP-RE's return on capital is anticipated to be in the region of 10-11% for 2017, somewhat lower than the company's five-year average (2012 to 2016) of 12.2%. This is mainly driven by an expected lower level of investment returns on bonds and bank deposits in Kenya and other regional markets, and also higher capital levels in relation to the premiums being written. The combined ratio is expected to remain at approximately 90%.
ZEP-RE remains focused primarily on East African markets, with Kenya contributing 45% of GWP in the first half of 2017. The company continues to build its presence in its core markets and to expand in territories with attractive profit potential. Although ZEP-RE has maintained resilient profitability in challenging markets, A.M. Best believes the competitive landscape may add negative pressure to ZEP-RE's earnings over the longer term.
The company has a developed set of ERM responsibilities and internal reporting commitments alongside ambitious targets to enhance ERM activity. Nevertheless, A.M. Best views East African markets as presenting a considerable challenge to companies attempting to manage their risks effectively.
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