Nairobi, 9 October 2020 – 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|
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 very strong risk adjusted capitalisation, intermediate earnings and 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 very strong, supported by the recent turnaround in earnings performance. As such, the GCR capital adequacy ratio (“CAR”) improved to 3.3x at FY19 (FY18: 2.3x), while the statutory CAR remained high at 2.7x (FY18: 3.3x). Going forward, risk adjusted capitalisation could be assessed at similar levels should the recent turnaround in profitability be sustained and contribute to capital growth, considering potential risks emanating from the COVID-19 pandemic.
The insurer’s earnings are assessed to be intermediate, taking into account the recent turnaround in underwriting results and enhanced bottom line performance. The turnaround in underwriting profitability was largely driven by a reduction in operating expenses, offsetting a moderate increase in claims incurred. In this regard, the operating expense ratio improved to 45% (FY18: 77%), while the claims ratio closed higher at 40% (FY18: 34%), attributable to an increase in motor commercial claims. Resultantly, the group reported an underwriting surplus of TZS784m (prior two-years: TZS3.2bn loss), translating to an underwriting margin of 6% (prior two-year margin: -15%). This was further supported by healthy investment income, which grew to TZS2.4bn, with the group closing the year with a net profit after tax of TZS2.5bn. While note is taken of the reduction in earnings in 1H F20 caused by flood claims incurred in January, the insurer’s ability to sustain earnings turnaround over the rating outlook may be positively viewed.
Liquidity was maintained at an intermediate level, supported by conservative asset allocation. Accordingly, cash and stressed financial assets coverage of net technical provisions stabilised at 1.8x at FY19, while coverage of operational cost requirements was sustained at 24 months. Liquidity metrics are expected to measure at similar levels going forward given management’s strategy of maintaining the current asset allocation.
The rating is negatively impacted by the insurer’s limited business profile. In this regard, Reliance maintained an intermediate competitive position, with a market and relative market share of 3.1% and 0.8x in FY19, respectively. The premium base is somewhat diversified, with three lines of business contributing materially to the gross premium base. The insurer’s revenue source is geographically concentrated, given that all premiums are derived from the primary market. GCR expects the competitive position and business mix to be maintained at similar levels over the rating outlook.
The Stable Outlook reflects GCR’s expectations of persistent stability in capitalisation, while factoring in the likelihood of a sustained improvement in earnings. Accordingly, the GCR CAR is projected to trend above 3x over the next 12 months, with the underwriting margin likely to stabilise within the 0% to 5% range.
Positive rating action may stem from a sustainable improvement in earnings, while all other credit protection metrics remain within strong to very strong ranges. Conversely, downward rating pressure may arise from a reduction in market share and/ or earnings strain.
|Primary analyst||David Mburu||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 20 367 3618|
|Secondary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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|
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 2019|
Risk score summary
|Rating components and factors||Risk score|
|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 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 2019;
- Four years of comparative audited financial statements to 31 December 2019
- Full year budgeted financial statements to 31 December 2020.
- Unaudited interim results to 30 June 2020.
- Reinsurance cover notes for 2020; and
- Other relevant documents.