Johannesburg, 29 September 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Phoenix of Tanzania Assurance Company Limited of AA-(TZ), with the rating 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 Phoenix of Tanzania Assurance Company Limited (“Phoenix Tanzania”) based on the following key criteria:
Phoenix Tanzania’s rating continues to be underpinned by the maintenance of extremely strong solvency and liquidity. The loss of key accounts linked to government business is likely to see notable top line premium contraction, negatively impacting on competitive positioning and underwriting performance (through lower scale and reduced commission recoveries respectively) over the short to medium term. This notwithstanding, the preservation of very strong balance sheet strength is viewed to provide a high degree of loss absorption capacity, catering for potential growth strain and earnings pressure.
The rating derives significant upliftment from Phoenix Tanzania’s extremely strong capitalisation, with the international solvency margin registering at a very high 301% at FY16. Consistent profit generation (cumulatively amounting to TZS15.4bn) and conservative dividend extractions (cumulatively TZS3.3bn) have supported healthy capital build, with shareholders’ funds growing at a four year compound annual growth rate of 9%. Risk adjusted capitalisation remains extremely strong, with the large capital base able to absorb high exposure to investment property (55% of FY16 capital), while being supported by contained underwriting and credit exposures. This is expected to be maintained at very strong levels over the medium term, with the sizeable capital balance’s loss absorption capacity limiting the insurer’s risk sensitivity to potential growth and earnings deviation.
The rating also derives upliftment from very strong liquidity, which is supported by the large quantum of cash investments (FY16: TZS24.2bn or USD11m). Despite higher claims and working capital challenges constraining operating cash flows in FY16, liquidity metrics remained at very strong levels, with cash coverage of average monthly claims and net technical provisions registering at 54 months and 2.2x respectively at FY16 (FY15: 89 months and 2.9x respectively). Liquidity strength is expected to persist over the rating horizon on the back of consistency in the investment strategy and potential for improved working capital movements subsequent to tighter regulatory controls governing premium collections.
Earnings capacity weakened to an intermediate level, following the persistence of elevated operating costs (particularly over the past two years), and reversion of claims to historical levels. In this respect, the operating expense ratio remained high at 67% (FY15: 70%; five year average: 57%), while the claims ratio rose to 52% (FY15: 34%). As such, Phoenix Tanzania reported an underwriting loss for the first time over the review period (TZS540m). Net profitability was also negatively impacted by reduced investment income (a function of strained operating cash flows), with the investment yield (excluding of unrealised income) dropping to 6% in FY16 (FY15: 8%; review period average: 7%). Going forward, scope for further earnings pressure exists, given the expected reduction in scale due to the new directive stating that all government related business (including parastatals) should be undertaken by the National Insurance Company Tanzania, and associated commission inflows, while investment income is expected to remain subdued in the short term. As such, targeted levels of profitability over the short to medium term will be dependent upon claims containment and realisation of cost cutting initiatives.
Phoenix Tanzania’s competitive position is viewed to be intermediate, and expected to moderate in FY17, following the loss of key government business. Support in terms of market entrenchment is derived from a broad branch network and long standing corporate relationships, underpinning a relatively balanced premium distribution mix.
The insurer’s treaty reinsurance programme is predominantly placed with highly rated entities, whilst net deductibles on XoL per risk and event remain well contained relative to capital (at 0.4% at FY16).
The rating currently matches the national scale ceiling applicable to entities operating in Tanzania. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. Persistent underwriting deficits, accompanied by a protracted loss in market share, may trigger negative rating action. Furthermore, a weakening in risk adjusted capital and/or liquidity may also result in downward rating movement.
| NATIONAL SCALE RATINGS HISTORY |
| Initial rating (November 2005) |
| Claims paying ability: AA-(TZ) |
| Outlook: Stable |
| Last rating (September 2016) |
| Claims paying ability: AA-(TZ) |
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst |
| Vinay Nagar |
| Credit Analyst |
| (011) 784-1771 |
| vinay@globalratings.net |
| Committee Chairperson |
| Yvonne Mujuru |
| Sector Head: Insurance Ratings |
| (011) 784-1771 |
| ymujuru@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Phoenix Tanzania rating reports, 2005-2016
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.
Phoenix of Tanzania Assurance Company 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 Phoenix of Tanzania Assurance Company Limited with no contestation of the rating.
The information received from Phoenix of Tanzania Assurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited financial statements to 31 December 2016
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements to 31 December 2017
- Unaudited interim results to 31 July 2017
- Other relevant 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
| Balance Sheet | Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed. |
| 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 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. |
| Commission | A certain percentage of premiums produced that is received or paid out as compensation by an insurer. |
| 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. |
| 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. |
| Industry Risk | The risk that defaults will arise in an industry because of factors specifically affecting that industry. |
| 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. |
| 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. |
| Loss | The happening of the event for which insurance pays. |
| Net Profit | Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees. |
| Operating Expense Ratio | Measures the proportion of operating expenses in net premiums earned. |
| 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. |
| Shareholder | An individual, entity or financial institution that holds shares or stock in an organisation or company. |
| 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. |
| Working Capital | Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances. |
| Yield | Percentage return on an investment or security, usually calculated at an annual rate. |
For a detailed glossary of terms please click here
GCR affirms Phoenix of Tanzania Assurance Company Limited’s rating of AA-(TZ); Outlook Stable.
