Johannesburg, 04 October 2016 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Alliance Insurance Corporation Limited of AA-(TZ), with the outlook accorded as Stable. The rating is valid until September 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Alliance Insurance Corporation Limited (“Alliance”) based on the following key criteria:
Alliance’s capitalisation is viewed to be very strong, underpinned by a sizeable capital base catering for the quantum of insurance and market risk exposure. In this respect, the international solvency margin registered at a strong 117% at FYE15 (FYE14: 121%), and is expected to remain within a strong range. High internal capital generation, together with fairly conservative dividend distributions, are likely to underpin very strong risk-adjusted capital adequacy over the rating horizon.
The insurer reflects strong liquidity metrics. In this respect, cash covered net technical provisions by 0.8x, while the claims cash cover ratio equated to 19 months at FYE15 (FYE14: 1x and 17 months respectively). Going forward, liquidity metrics are expected to remain at strong levels, supported by balanced asset allocation and sound operating cash flow generation.
Alliance evidences strong earnings capacity, underpinned by healthy underwriting profits. In this regard, the insurer’s five year aggregate underwriting margin equated to 6% (FY15: 8%; FY14: 9%). Earnings capacity is further supported by a large quantum of investment income. As such, the review period average operating margin registered at a strong 20%. GCR expects earnings capacity to remain within a strong range over the rating horizon.
The insurer reflects a strong competitive position, underpinned by a comparatively high share of short term industry gross premiums (FY15: 10%). In this regard, Alliance is a leading player in the local short term insurance market. Enhanced market share has been targeted going forward, primarily through a more diversified distribution strategy. GCR expects the insurer to defend its healthy competitive position, underpinned by high franchise value and established corporate relationships.
A level of earnings concentration is noted, with motor and fire together representing 66% of gross premiums (83% of net premiums). Nevertheless, the insurer’s earnings profile is viewed positively, supported by the sound levels of profitability achieved in these classes. Going forward, management expects to diversify earnings, supported by an increase in the engineering business.
The reinsurance panel reflects a sound aggregate credit profile, while maximum net deductibles are limited to conservative levels relative to capital.
The rating currently matches the national scale ceiling applicable to entities operating within the Tanzanian short term insurance industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Conversely, a deterioration in liquidity or asset quality, or material weakening in capital adequacy may give rise to negative ratings pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2006)|
|Claims paying ability: A+(TZ)|
|Last rating (September 2015)|
|Claims paying ability: AA-(TZ)|
|Primary Analyst||Secondary Analyst|
|Yvonne Masiku||Zwivhuya Mukosi|
|Senior Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Alliance Insurance Corporation Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Alliance Insurance Corporation Limited with no contestation of the rating.
The information received from Alliance Insurance Corporation Limited and other reliable third parties to accord the credit rating included:
- Audited financial results as per 31 December 2015
- Five years of comparative audited numbers
- Unaudited interim results as per 30 June 2016
- Budgeted financial statements for 2016
- The current year reinsurance cover notes
- Other non-public statistical information
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|Agent||One who solicits, negotiates or effects contracts of insurance on behalf of an insurer. An agent can be independent, being one that represents several companies, or a captive (tied) agent that sells insurance for only one company.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|Interest||Money paid for the use of money.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Margin||Measures the efficiency of profit generation from investments and underwriting.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|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.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR affirms Alliance Insurance Corporation Limited’s rating at AA-(TZ); Stable Outlook.