Announcements Insurance Rating Alerts

GCR affirms Reliance Insurance Company (Tanzania) Limited’s national scale financial strength rating of A(TZ); Outlook Stable.

Rating action

Nairobi, 12 October 2021 – GCR Ratings (“GCR”) has affirmed Reliance Insurance Company (Tanzania) Limited’s (“Reliance”) national scale financial strength rating of A(TZ), with the outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Reliance Insurance Company (Tanzania) Limited Financial strength National A(TZ) Stable Outlook

Rating rationale

The rating of Reliance reflects the strengths and weaknesses of Reliance and its subsidiary (together “the group”), given that the insurer is the core operating entity of the group. In this respect, the rating is underpinned by the group’s strong risk adjusted capitalisation and intermediate liquidity. Nevertheless, the business profile remains a rating restraint, characterised by an average market position and moderate levels of premium diversification.

Risk adjusted capitalisation remained within strong levels, despite moderations experienced in FY20. On account of net losses incurred and dividend distribution of about TZS140m, the insurer’s capital base slightly moderated to TZS16.0bn (FY19: TZS16.3bn) while increasing its underlying risk exposures. In this respect, the GCR Capital Adequacy Ratio (“CAR”) reduced to 2.2x (FY19: 2.8x). Similarly, the entity’s statutory CAR also reduced to 2.3x (FY19: 2.7x). Going forward, we expect GCR CAR to be within 2.1x-2.4x, bolstered by internal capital generation.

Liquidity is a rating strength, underpinned by increased liquid assets that offset higher technical liabilities and operating expenses, sustaining its liquidity metrics. As such, the cash and stressed assets coverage on net technical liabilities was maintained at 1.8x while operating cash coverage registered at 22 months (FY19: 23 months). Liquidity metrics are expected to be sustained at similar levels, supported by a conservative asset allocation.

The insurer’s earnings are assessed to be intermediate, balancing underwriting pressures and net realised income over the five-year review period. Claim experience is viewed to be high, outbalanced by outstanding claim reserve releases. As such, the entity registered a paid loss ratio of 48.5% (FY19: 38.3%, FY18: 44.2%) and net incurred loss ratio of 39.6% (FY19: 37.1%, FY18: 34.4%). Further, during the year FY20, the entity incurred one off costs of about TZS 1.7bn related to provisioning of taxes pertaining to prior year’s tax audit and business administration costs, moderating the average underwriting margin to -7.2% (FY19: -1.4%) .Net earnings were also moderated due to property write-downs of about TZS440m following a reduction in rental fee charges. This resulted to the insurer registering an average return on revenue of 12.7% (FY19: 13.8%). Earnings are expected to slightly improve, underpinned by increased investment income that is anticipated to offset high operating expenses and an unfavourable claims experience.

The rating remains moderated by the insurer’s limited business profile. The insurer has limited portfolio diversification with two lines of business contributing materially to gross premiums. Further, it remains highly concentrated in the motor book, accounting for about 52% (FY19: 43%) of the entity’s gross written premiums. Positively, reinforced by a strategic partnership, the entity’s market share and relative market share improved to 4.4% (FY19: 3.1%) and 1.1x (FY19: 0.8x). Growth in the near-term is expected to improve on the backdrop of the existing partner with expectation of the relative market share registering around 1.2x-1.3x.

Outlook statement

The Stable Outlook reflects GCR’s expectations of stability in capitalisation, while factoring in the likelihood of net earnings improvements. Accordingly, the GCR CAR is projected to trend above 2.2x in the near-term. While underwriting pressures are seen to persist, it may be offset by investment income.

Rating triggers

Positive rating action may ensue from sustained profitable growth and risk adjusted capital improving to above 2.6x, as other credit protection metrics are maintained at similar levels. Conversely, a negative rating would occur if earnings deteriorated beyond expected levels, registering negative margins that would consequently result in a GCR CAR below 2.2x.

Analytical contacts

Primary analyst David Mungai Analyst: Insurance Ratings
Nairobi, KE DavidM@GCRratings.com +254 20 367 3618
Committee chair Vinay Nagar Senior Analyst: Financial Institutions Ratings
Johannesburg, ZA VinayN@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, October 2021
GCR Insurance Sector Risk Scores, September 2021

Ratings history

Reliance Insurance Company (Tanzania) Limited

Rating class Review Rating scale Rating Outlook Date
Claims paying ability Initial National A(TZ) Stable July 2008
Financial strength Last National A(TZ) Stable October 2020

Risk score summary

Rating components and factors Risk score
Operating environment 6.75
Country risk score 3.75
Sector risk score 3.00
Business profile (1.00)
Competitive position (0.25)
Premium diversification (0.75)
Management and governance 0.00
Financial profile 2.50
Earnings 0.00
Capitalisation 2.00
Liquidity 0.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total score 8.25

Glossary

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 ACORDED TO THE RATING

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 entity. 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 entity and other reliable third parties to accord the credit rating included:

  • Audited financial results as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December 2019
  • Full year budgeted financial statements to 31 December 2021.
  • Unaudited interim results to 30 June 2021.
  • Actuarial valuation reports for 2020
  • Reinsurance cover notes for 2021; and
  • Other relevant documents.
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