Johannesburg, 20 August 2020 – GCR Ratings (“GCR”) has affirmed The Heritage Insurance Company Tanzania Limited’s (“Heritage Tanzania”) national scale financial strength rating of AA(TZ), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|The Heritage Insurance Company Tanzania Limited||Financial strength||National||AA(TZ)||Stable Outlook|
Heritage Tanzania’s national scale financial strength rating reflects its strong financial profile, supported by very strong capitalisation and liquidity, as well as moderately strong earnings. These credit positives are, however, partially offset by a limited business profile.
Risk adjusted capitalisation has been consistently maintained at very strong levels over the review period, underpinned by limited credit and market risk exposures. Nevertheless, material dividend extractions over the review period reduced absolute capital to TZS14.9bn at FY19 (FY13: TZS18.2bn). This, coupled with increased insurance risk in FY19, resulted in a lower GCR capital adequacy ratio (“CAR”) (2.4x compared to 3.0x in FY18). Furthermore, Heritage Tanzania’s regulatory solvency deteriorated from 395% in FY18 to 164% in FY19 due to an increase in insurance risk, coupled with the impact of the adoption of IFRS 16 on lease accounting. Growth in the capital base is viewed to be unlikely in the short term; however, risk adjusted capitalisation is anticipated to remain within a similar range, given expectations of limited premium growth as a result of weakening economic conditions.
Heritage Tanzania maintained a very healthy liquidity profile, supported by a conservatively invested asset portfolio. Accordingly, cash and stressed financial assets coverage of net technical liabilities measured at 3.8x (FY18: 3.6x), while operational cash coverage registered at 29 months at FY19 (FY18: 36 months). GCR expects liquidity metrics to remain within a similar range over the outlook horizon, considering the insurer’s relatively low operational cash requirements compared to accumulated liquidity reserves.
Earnings are moderately strong, supported by sound investment income, offsetting volatile underwriting profitability due to the insurer’s operating cost structure. In this respect, the five year underwriting margin equated to 5% (FY19: 5%; FY18: 11%), while the five year return on revenue registered at 17% (FY19: 14%; FY18: 25%). Although earnings are predicted to moderate in FY20 as a result of limited premium growth and investment returns, GCR expects a recovery over the medium term on the back of the insurer’s competitive risk selection, coupled with supportive regulations on premium rates, as well as cash and carry policies.
The insurer’s competitive position remained moderately strong, supported by strong brand recognition and entrenched market relationships. In this regard, Heritage Tanzania accounted for 7.9% of the short term insurance industry premiums in FY19 (FY18: 7.3%). However, despite a steady upward premiums trend, the factor assessment is expected within similar bands over the medium term, given expectations of premiums contractions due to COVID-19 pandemic risks. Furthermore, premium diversification remained constrained by limited geographic diversification, offsetting healthy product diversification, with three lines of business contributing materially to gross premiums.
The Stable Outlook reflects expectations of sustained financial profile strength, while factoring in the likelihood of earnings to moderate in the short term as a result of limited premium growth and interest rate cuts in response to the COVID-19 pandemic. Capitalisation and liquidity metrics are expected to tolerate the level of earnings pressure over the medium term. As such, the GCR CAR is likely to remain around 2.5x, while liquidity coverage metrics are expected to remain above 2x, factoring in risks from persistent dividend extraction. Furthermore, no material changes on the business profile are expected over the rating horizon.
Upward rating movement may follow a sustained improvement in earnings capacity and the business profile. Conversely, negative rating pressure may stem from a material reduction in earnings capacity. Furthermore, a deterioration of liquidity and/or risk adjusted capitalisation below expectations could result in negative rating action.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance|
|Johannesburg, ZA||GodfreyC@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|
The Heritage Insurance Company Tanzania Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(TZ)||Stable||June 2007|
|Financial strength||Last||National||AA(TZ)||Stable||November 2019|
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.00|
|Management and governance||0.00|
|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 party. 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 31 May 2020;
- Reinsurance cover for 2020; and
- Other relevant documents.