Johannesburg, 6 October 2017- Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to ICEA Lion General Insurance Company (Tanzania) Limited of A(TZ), with the outlook accorded as Negative. The rating is valid until September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to ICEA Lion General Insurance Company (Tanzania) Limited (“ICEA Lion Tanzania”) based on the following key criteria:
The Negative outlook reflects ICEA Lion Tanzania’s reduction in earnings capacity, which is likely to deteriorate further, on the back of very weak underwriting profitability, coupled with softened investment returns. In this regard, underwriting margins are likely to register within a very weak range (-20% to -25%), on the back of reduced scale efficiencies (stemming from negative premium growth expectations). This compares with a prior five year underwriting margin of -8% over the review period (FY16: -12%; FY15: -1%). Investment returns are likely to be impacted by reduced interest rates, together with continued exposure to the volatility of fair value movements. As such, the operating margin is likely to register below 5% going forward (review period average: 13%).
Additionally, competitive positioning is likely to register at a moderately weak level, given premium growth strain on the back of a shift in competitive dynamics. In this regard, a new regulation was passed stating that all government related business (including business from parastatals) should be undertaken by the National Insurance Company Tanzania. Accordingly, GCR expects the insurer’s share of short term insurance industry gross premiums to register at around 1% to 2% (FY16: 5%; FY15: 3%). Cognisance is taken of the large once-off project (which was highly reinsured), which inflated the insurer’s market share in FY16.
ICEA Lion Tanzania’s capitalisation is strong, supported by sound historical internal capital generation, and well contained dividend distributions. The international solvency margin, excluding aged debtors and dividends, equated to a high 144% at FY16 (FY15: 122%). Over the medium term, GCR notes the potential for limited capital generation, together with dividend distributions, to result in a lowering in risk adjusted capitalisation. Reinsurance counterparties evidence an intermediate level of aggregate credit strength, with maximum exposure per risk and event maintained at 6% of FY16 capital.
The insurer’s liquidity profile is viewed to be strong, supported by very strong liquidity metrics, which are partially offset by intermediate aggregate banking counterparty strength. In this respect, cash coverage of technical liabilities equated to a high 1.6x at FY16 (FY15: 1.5x), while claims cash coverage equated to 44 months at FY16 (FY15: 51 months). The majority of liquid funds are placed in government securities (FY16: 51%; FY15: 45%), while the balance is mainly in unrated banks (with one banking institution reflecting a moderately weak credit rating). GCR expects the liquidity profile to remain within a strong range over the rating horizon, albeit noting the potential for medium term suppression.
The business mix is characterized by large scale commercial risks, resulting in revenue volatility. Management aims to enhance earnings diversification, with increased focus on retail business. In GCR’s view, earnings are likely to remain volatile over the medium term.
The rating may be downgraded if underwriting profitability registers at very weak levels, coupled with subdued investment returns. Furthermore, a material deterioration in capitalisation and/ or liquidity may be negatively viewed. A rating upgrade is considered unlikely over the rating horizon. However, the outlook may revert to Stable should earnings capacity strengthen to historical levels. This would need to be supported by capitalisation and liquidity remaining at strong levels.
NATIONAL SCALE RATINGS HISTORY
Initial rating (August 2006)
Claims paying ability: A(TZ)
Last rating (September 2016)
Claims paying ability: A(TZ)
|Yvonne Mujuru||Linda Matavire|
|Sector Head: Insurance Ratings||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 2017
ICEA Lion General Insurance Company (Tanzania) Limited 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. 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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ICEA Lion General Insurance Company (Tanzania) Limited participated in the rating process via 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, and contested by, ICEA Lion General Insurance Company (Tanzania) Limited with no change to the rating decision.
The information received from ICEA Lion General Insurance Company (Tanzania) Limited and other reliable third parties to accord the credit rating includes:
- Audited financial results to 31 December 2016
- Unaudited interim results to 30 June 2017
- Four years of comparative audited numbers
- Budgeted financial statements for 2017
- 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.|
|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.|
|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.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|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.|
|Upgrade||The assignment of a higher credit rating to an insurer by a credit rating agency. Opposite of downgrade.|
For a detailed glossary of terms, please click here
GCR affirms ICEA Lion General Insurance Company (Tanzania) Limited’s rating of A(TZ); Outlook Negative.