Zambia’s debt crisis complicates cash management, expansion for Klapton Reinsurance

The company has started moving bank accounts away from Zambia to address issues raised by the Moody’s ratings agency, CEO Webster Twaambo tells The Africa Report.

Moody’s in June 2022 assigned its Caa3 Insurance Financial Strength (IFS) ratings to Klapton with a stable outlook. The rating is constrained by linkage to the Zambian government’s credit profile and “significant cash and investment holdings in banks and government debt,” the agency said.

Zambia in August won IMF approval for a $1.3bn three-year loan programme to ease the pressure on its public finances as debt restructuring talks continue. The process of diversifying the location of cash holdings is under way, Twaambo says. Some accounts have been opened in unnamed higher-rated jurisdictions and more new accounts will be opened outside Zambia in 2023. “This is a balancing act between regulatory requirements and the ratings agencies.”

Twaambo points out that pan-African banks with strong financial profiles operate in the country. He declined to comment on the reinsurer’s exposure to Zambian government debt. “We are a Zambian reinsurer and want to show confidence in the Zambian economy,” he says.

Moody’s also said it expects Klapton’s capital levels will need to be strengthened further to comfortably meet expected risk-based capital requirements. Shareholders have foregone dividends for 2022 and have committed to providing new capital, Twaambo says. He describes the company’s capital needs as a “moving target” but says that shareholders would “certainly” support a request for further funding.

Agriculture, Engineering Risks

The global reinsurance market is dominated by half a dozen large players, and reinsurance rates have been on an upward trend since before Covid-19. Twaambo says that the majors will keep rates high in the short term. But higher prices are also attracting new players who are “much more assertive and compete on reduced rates.”

Privately owned Klapton began operating in October 2021. The company provides reinsurance in India and South America as well as eastern and southern Africa, and aims to expand its presence across the African continent.

Klapton in November obtained Zambian regulatory approval to write life and health reinsurance. Twaambo says the company will start making health and life cover available across Africa this year. He also plans to extend the availability of agricultural and engineering risk reinsurance. Agriculture will be the focus of expansion in the first half of this year, and engineering in the second half, with the company employing more specialists in those areas as needed, Twaambo says.

Failing to resolve Zambia’s debt crisis may complicate those plans. Moody’s says that the company’s plans to grow premium volumes in new geographic regions mean higher underwriting risk. While Klapton does not have financial debt outstanding, its flexibility is “limited by lack of direct access to capital markets, and private ownership,” Moody’s says.

Bottom Line

Growth in African reinsurance capacity may be delayed by Zambia’s debt default.