Moody’s raises KlaptonRe’s financial strength rating to Caa1, outlook remains stable

Moody’s Ratings has upgraded Klapton Reinsurance Limited’s (KlaptonRe) Insurance Financial Strength Rating (IFSR) to Caa1 from Caa2, while maintaining a stable outlook.

According to Moody’s, the upgrade reflects KlaptonRe’s significant growth in business and assets outside of Zambia, which has lessened its exposure to the local operating environment and to risks associated with the Government of Zambia, currently rated Caa2 with a positive outlook.

Moody’s notes that KlaptonRe has increased its premium volumes and expanded its market presence, particularly among less traditional cedants.

The company also benefits from good diversification across insured exposures and has demonstrated historically solid profitability. Moody’s adds that these developments could enhance KlaptonRe’s financial profile if the newly written business continues to perform in line with expectations.

However, Moody’s points out that these strengths are tempered by several ongoing challenges. The reinsurer faces elevated product and reserving risks, especially following its entry into new markets such as North America.

Moody’s highlights that this expansion has introduced longer-term exposures and increased catastrophe risk, which could affect future profitability. The rating agency also notes that the company’s capital adequacy is under pressure as premium and risk growth continues to outpace the growth in shareholders’ equity.

Moody’s reports that KlaptonRe’s asset quality remains relatively weak due to its continued holdings of Zambian government debt, which constitute a substantial portion of its capital base.

In addition, the reinsurer carries high levels of receivables from retrocession partners of lower credit quality, which further constrain its financial strength. Moody’s also highlights KlaptonRe’s limited financial flexibility due to its privately held ownership structure.

Although KlaptonRe’s rating is now one notch higher than the sovereign rating of Zambia, Moody’s emphasizes that the reinsurer’s financial profile remains closely tied to Zambia’s creditworthiness. This is due to KlaptonRe’s significant exposure to Zambian government securities and local real assets, which still comprise a large share of its capital.

Moody’s observes that KlaptonRe achieved substantial financial growth over the past year, with insurance revenue rising by approximately 183% to ZMW 2.97 billion in 2024, up from ZMW 1.05 billion in 2023. This performance led to an increase in net income to ZMW 236 million in 2024 from ZMW 120 million the previous year.

Nevertheless, Moody’s cautions that the reinsurer is increasingly exposed to business lines with longer-tail liabilities and higher event risk, which introduces uncertainty regarding the sustainability of these profitability levels.

The agency also points out that KlaptonRe’s high returns on capital—48.3% in 2024 and 53.6% in 2023—reflect substantial underwriting leverage, indicating a growing mismatch between business volume and available capital.

Regarding capital adequacy, Moody’s notes that KlaptonRe’s regulatory solvency ratio improved to 31% at the end of 2024 from 28% at the end of 2023, well above the Zambian regulatory minimum of 10%.

However, Moody’s clarifies that this measure is not risk-based and does not account for the company’s increasing exposure relative to its capital base. Using its own metric, Moody’s reports that KlaptonRe’s gross underwriting leverage (GUL)—which compares gross premiums and reserves to shareholders’ equity—rose to 9.7x at year-end 2024 from 7.1x in 2023 and 4.1x in 2022. This trend underscores the growing strain on capital adequacy despite the improvement in regulatory solvency ratios.

Moody’s also flags governance-related risks as a factor weighing on the rating. In particular, Moody’s cites concerns about KlaptonRe’s financial strategy and risk management practices, especially as the pace of growth in exposures continues to exceed growth in capital.

The company’s rapid entry into new markets—though consistent with its board-approved strategic plan—raises questions about its ability to sustain profitable expansion in these territories.

Moody’s explains that the stable outlook reflects a balanced view of KlaptonRe’s emerging strengths and the ongoing risks tied to its ambitious growth strategy.

While the reinsurer’s business profile is improving, the stability of its rating depends on addressing the challenges related to capital adequacy and underwriting performance. Moody’s adds that even if Zambia’s sovereign rating were to improve, KlaptonRe’s rating is unlikely to be upgraded until these company-specific risks are resolved.

Looking ahead, Moody’s indicates that a further upgrade would require stronger capital adequacy—such as higher buffers above regulatory requirements and a sustained decline in GUL below 7x—as well as greater clarity and consistency in the performance of its North American business.

On the other hand, Moody’s notes that the rating could be downgraded if Zambia’s sovereign rating is lowered, if capitalisation weakens further relative to business volume, or if underwriting results deteriorate, with combined ratios consistently above 100%.

Moody’s assigns this rating in accordance with its “Reinsurers” methodology published in April 2024. The agency explains that KlaptonRe’s “Standalone Scorecard-indicated Outcome” of Caa1 reflects a five-notch downward adjustment from the “Preliminary Standalone Outcome” of Ba2. This adjustment is due to the sovereign constraint, asset quality concerns, and governance-related risks identified by Moody’s.