Announcements

GCR affirms Alliance Insurance Corporation Limited’s rating of AA-(TZ); Outlook Stable.

Johannesburg, 6 October 2017 — 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 2018.

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 reflects very strong risk adjusted capitalisation, supported by a sizeable capital base catering for the quantum of insurance and market risk exposures. Accordingly, the international solvency margin (excluding aged debtors and dividends) equated to a high 92% at FY16 (FY15: 105%; review period average: 107%). Risk adjusted capitalisation is likely to remain within a very strong range over the rating horizon, underpinned by a reduction in underwriting risk (given expectations of premium contractions), and supported by well contained dividend distributions. The reinsurance panel reflects a sound aggregate credit profile, while maximum net deductibles are limited to conservative levels relative to capital.

Key liquidity metrics have been maintained at strong levels, supported by sound operating cash generation. In this respect, cash covered net technical liabilities by an unchanged 0.8x at FY16, with cash coverage of monthly claims equating to 18 months at FY16 (FY15: 19 months). Key liquidity measures are likely to remain within a strong range, supported by balanced asset allocation.

Alliance’s earnings capacity remained at strong levels throughout the review period, supported by healthy underwriting profitability and robust investment income (a function of the sizable investment portfolio). In this regard, the five year aggregated underwriting margin equated to 6% (FY16: 5%; FY15: 8%), while the operating margin averaged a strong 21% over the review period. Going forward, earnings capacity is likely to moderate on the back of reduced underwriting profits (given reduced scale efficiencies), while investment returns are expected to be impacted by reduced rates and exposure to fair value movements. As such, the operating margin is likely to register around 12% over the outlook horizon.

The insurer reflects strong competitive positioning. In this regard, Alliance is one of the leading players in the domestic short term insurance market, with a share of 10% of total short term industry gross premiums in FY16. Management aims to defend its market position, supported by high franchise value and established corporate relationships, in light of a shift in competitive dynamics and continued economic challenges. While GCR expects the insurer to remain a top tier player, cognisance is taken of likely premium contractions, on the back of new cash and carry regulations, as well as a new directive that was passed stating that all government related business (including business from parastatals) should be undertaken by the National Insurance Company of Tanzania.

Earnings are heavily reliant on one line of business (motor), representing 49% of gross premiums in FY16 (FY15: 41%). Similarly, the risk base is heavily skewed towards motor, accounting for 76% of net premiums in FY16 (FY15: 72%). Nonetheless, this concentration is partially offset by relatively low product risk in this class. Going forward, management expects to diversify the earnings profile by expanding distribution channels.

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. The rating may be downgraded if the insurer were to evidence a reduction in risk adjusted capital adequacy, a sustained weakening in earnings capacity, and/or a weakening in liquidity metrics.

NATIONAL SCALE RATINGS HISTORY
 
Initial rating (December 2006)
Claims paying ability: A+(TZ)
Outlook: Stable
 
Last rating (September 2016)
Claims paying ability: AA-(TZ)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst Secondary Analyst
Yvonne Mujuru Zwivhuya Mukosi
Sector Head: Insurance Ratings Junior Credit Analyst
(011) 784 – 1771 (011) 784 – 1771
ymujuru@globalratings.net zwivhuyam@globalratings.net

Committee Chairperson
Susan Hawthorne
Senior Credit Analyst
(011) 784 – 1771
susanh@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2017

Alliance rating reports, 2006-2016

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/RATING-SCALES-DEFINITIONS. 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:

  • The 2016 audited annual financial statements 4 years of comparative audited numbers
  • Unaudited interim results to 31 July 2017
  • Budgeted financial statements for 2017
  • 2017 reinsurance cover notes
  • Other related documents.

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

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.
Cash Funds that can be readily spent or used to meet current obligations.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Distribution Channel The method utilised by the insurance company to sell its products to policyholders.
Enterprise Risk Management ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.
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.
International Scale Rating (“ISR”) 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.
Intermediary A third party in the sale and administration of insurance products.
Interest Money paid for the use of money.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
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.
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 (“NSR”) National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.
Policyholder The person in actual possession of an insurance policy.
Portfolio All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
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.
Statutory Required by or having to do with law or statute.
Subordinated Debt Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.
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 more detailed glossary of terms, please click here

GCR affirms Alliance Insurance Corporation Limited’s rating of AA-(TZ); Outlook Stable.

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