Nairobi-headquartered East Africa Reinsurance Company (EARe) has a track record of solid operating performance in challenging market conditions, evidenced by its good five-year (2015-2019) weighted average return on equity (ROE) of 14.3%, notes AM Best.
The ROE should, however, be viewed in light of moderate inflation in Kenya, which has averaged approximately 6% over the same period. Underwriting results though have been improving, demonstrated by a reduction in the combined ratio from 100.6% in 2015 to 96.5% in 2019, the international credit rating agency adds.
AM Best has affirmed the Financial Strength Rating of B (Fair) and the Long-Term Issuer Credit Rating of “bb+” of EARe. The outlook of these credit ratings is stable.
Balance sheet strength
The ratings reflect EARe’s balance sheet strength, which AM Best categorises as very strong, as well as its adequate operating performance, limited business profile and marginal enterprise risk management.
EARe’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR). EARe’s risk-adjusted capitalisation benefits from a prudent investment allocation and low underwriting leverage.
An offsetting factor is EARe’s strategy to maintain a negative currency asset-liability mismatch on its US dollar-denominated business (accounting for approximately two-fifths of the company’s 2019 gross technical provisions), which exposes the company to potential capital volatility.
The ratings also consider the company’s significant exposure to the high economic, political and financial system risks in Kenya, with over 90% of EARe’s assets invested domestically, says AM Best.
EARe is a small reinsurer by global standards, with gross written premium of $46.5m in 2019. It has a presence across 32 countries in Africa and Asia, with premium volumes skewed toward East African insurance markets. EARe continues to take positive steps to improve and embed risk management throughout its operations, notes AM Best.