Announcements Insurance Rating Alerts

GCR affirms Alliance Insurance Corporation Limited’s national scale financial strength rating of A+(TZ); Outlook Stable

Rating action

Johannesburg, 27 October 2020 – GCR Ratings (“GCR”) has affirmed Alliance Insurance Corporation Limited’s (“Alliance”) national scale financial strength rating of A+(TZ), with a Stable Outlook.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook/Watch

Alliance Insurance Corporation Limited

Financial strength

National

A+(TZ)

Stable Outlook

Rating rationale

Alliance’s national scale financial strength rating reflects the credit strengths and weaknesses of Alliance and its subsidiaries (together “the group”), given that the insurer is the core operating entity of the group. The rating is underpinned by the group’s financial profile strength, supported by strong risk adjusted capitalisation, healthy earnings and liquidity. The business profile is considered to be neutral to the rating, underpinned by a moderately strong competitive position, offsetting comparatively limited premium diversification.

Risk adjusted capitalisation was maintained within a strong range over the review period, with the capital base catering for the level of aggregate risk exposures. As such, GCR capital adequacy ratio (“CAR”) for the group registered at 1.7x (FY18: 1.5x), with the review year improvement attributable to internal capital growth. Going forward, risk adjusted capitalisation is expected to remain strong, anchored by expectation of continued internal capital generation.

Group earnings are assessed to be healthy, underpinned by moderately strong underwriting profitability and sound investment income. Note is taken of an increase in the net commission expense ratio over the review period (FY15: 12%; FY19: 19%), albeit with underwriting profitability maintained within the same range. In this respect, the five year underwriting margin equated to 4% (FY19: 5%), while the return on revenue for the corresponding period registered at 12% (FY19: 15%). Earnings are likely to follow a similar trend over the outlook horizon, on the back of well contained claims and operating expenses as well as consistent investment income.

Liquidity is viewed to be rating positive, although a slight moderation was observed in liquidity metrics as a result of an increase in net technical liabilities. In this regard, cash and stressed financial assets coverage of net technical liabilities measured at 1.5x (FY18: 1.6x), while operational cash coverage registered at 16 months at FY19 (FY18: 17 months). Going forward, GCR expects liquidity metrics to be maintained within a similar range, although an improvement in cash collection following the institution of the cash and carry regulation will be positively viewed.

The group’s business profile is neutral to the rating with moderately strong competitive position offset by comparatively limited premium diversification. Competitive positioning is supported by Alliance and Alliance Life’s top tier positions in the Tanzanian short term and long term insurance industries, respectively. In this regard, the core operating entity occupied the second position in its industry with a corresponding market share of 11% in FY19, while Alliance Life was also ranked second with a market share of 13%. The premium base is fairly diversified, with three lines of business contributing materially to the gross premium base. However, the insurer’s revenue source is geographically concentrated, given that the majority of the premiums (93%) are derived from the primary market. GCR expects the business profile to be maintained at similar levels over the rating outlook.

Outlook statement

The Stable Outlook is premised on expectations of continued earnings resilience over the rating horizon, despite the presence of COVID-19 pandemic risks. As such, earnings are expected to support capitalisation at strong levels, while enforced cash and carry regulations may progressively strengthen liquidity assessment. Furthermore, competitive positioning is unlikely to change materially over the medium term.

Rating triggers

Positive rating movement may follow a sustained improvement in earnings capacity and the business profile while other credit protection metrics are maintained within strong ranges. Conversely, a deterioration in liquidity and/or risk adjusted capitalisation below expectations could result in negative rating action.

Analytical contacts

Primary analyst

Sylvia Mhlanga

Senior Analyst: Insurance Ratings

Johannesburg, ZA

SylviaM@GCRratings.com

+27 11 784 1771

     

Committee chair

Tichaona Nyakudya

Senior Analyst: Insurance Ratings

Johannesburg, ZA

TichaonaN@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Insurance Companies, May 2019

GCR Ratings Scales, Symbols & Definitions, May 2019

GCR Country Risk Scores, May 2020

GCR Insurance Sector Risk Scores, July 2020

Ratings history

Alliance Insurance Corporation Limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Claims paying ability

Initial

National

A+(TZ)

Stable

December 2006

Financial strength

Last

National

A+(TZ)

Stable

October 2019

Risk score summary

Rating components and factors

Risk scores

 

 

Operating environment

6.75

Country risk score

3.75

Sector risk score

3.00

   

Business profile

0.00

Competitive position

0.75

Premium diversification

(0.75)

Management and governance

0.00

 

 

Financial profile

2.25

Earnings

0.50

Capitalisation

1.50

Liquidity

0.25

   

Comparative profile

0.00

Group support

0.00

Government support

0.00

Peer analysis

0.00

   

Total score

9.00

Glossary

Premium

The price of insurance protection for a specified risk for a specified period of time.

Provision

The amount set aside or deducted from operating income to cover expected or identified loan losses.

Rating Horizon

The rating outlook period

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

Reinsurance

The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.

Retention

The net amount of risk the ceding company keeps for its own account.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Securities

Various instruments used in the capital market to raise funds.

Security

One of various instruments used in the capital market to raise funds.

Senior

A security that has a higher repayment priority than junior securities.

Short Term

Current; ordinarily less than one year.

Underwriting

The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the entities and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2019;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2020;
  • Unaudited interim results to 30 June 2020;
  • Reinsurance cover notes for 2020; and
  • Other relevant documents.

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