A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of B (Fair) and the issuer credit rating of “bb+” of East Africa Reinsurance Company Limited (East Africa Re) (Kenya). The outlook for both ratings remains stable.
The ratings of East Africa Re continue to reflect its modest competitive position in the Kenyan market, as well as its supportive risk-adjusted capitalisation and solid operating performance. The ratings also consider East Africa Re’s exposure to Kenya’s socio-economic difficulties.
East Africa Re’s competitive position continues to be limited by the compulsory legal cessions enjoyed by its larger competitors in the local and regional markets. These legal cessions require cedants to place a portion of their business with some of East Africa Re’s competitors before ceding business to the open market. Additionally, the company operates in a competitive environment, with larger reinsurers that benefit from better economies of scale.
Risk-adjusted capitalisation remains supportive of the company’s business plans, which forecast an annual rise in gross written premium (GWP) of approximately 20% in the near term. Growth in premium volume is expected to be supported by retained earnings and capital contributions from shareholders.
East Africa Re’s operating performance remains solid, with a five-year average return on capital and combined ratio of 12% and 94%, respectively. The company’s results in recent years have been affected by the deteriorating performance of the motor and medical lines of business, which combined account for approximately 30% of GWP. East Africa Re has taken steps to improve the performance of these classes by non-renewing a number of loss-making treaties.
Positive rating actions could occur if East Africa Re demonstrates an improving competitive profile in its target markets. This includes growth in technical profitability whilst maintaining risk-adjusted capitalisation at a strong level.
Negative rating actions could occur due to a sustained decline in East Africa Re’s operating profile. Additionally, deterioration in Kenya’s economic fundamentals could negatively affect East Africa Re’s ratings.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process.
