Johannesburg, 30 September 2021 – GCR Ratings (“GCR”) has affirmed Tanzania Reinsurance Company Limited’s (“Tan Re”) national scale financial strength rating of A(TZ), with a Stable Outlook. Furthermore, Tan Re’s international scale financial strength rating has also been affirmed at B-, with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Tanzania Reinsurance Company Limited||Financial strength||International||B-||Stable Outlook|
The ratings for Tan Re are supported by moderately strong risk adjusted capitalisation and competitive position, as well as modest earnings capacity. Offsetting these strengths is limited liquidity, due to high exposure to reinsurance receivables, and low premium diversification.
Tan Re’s capital base maintained an upward growth trend, registering a compound annual growth rate of 13% over the review period. As such, risk adjusted capitalisation remained strong, supported by a sizeable capital base, catering for the level of aggregate risk exposures. Capital build has been largely supported by sound profit generation and significant profit retention. In this regard, the reinsurer’s capital base amounted to TZS80bn at FY20 compared to TZS50bn at the beginning of the five-year review period. Consequently, the GCR capital adequacy ratio (“CAR”) consistently registered above 2x over the last five years.
Earnings registered within a sound range over the review period, underpinned by a well-managed operating cost structure, well contained claims and sound investment returns. In this respect, the operating expense ratio averaged 18% over the last five years, while the aggregated loss ratio equated to 60% over the same period. Accordingly, the five-year average underwriting margin registered at 7% (FY20: 12%). Healthy investment returns continued to support underwriting profitability, resulting in the return on revenue averaging 8% over the review period (FY20:10%; FY19: 8%). GCR expects earnings to follow the same trend over the rating horizon, potentially improving the assessment over the medium term if impairment risks from receivables are well managed.
We negatively view the reinsurer’s consistently high levels of premium receivables that have adversely impacted liquidity metrics, despite operating in a cash and carry environment. In this regard, premium receivables amounted to TZS44bn at FY20 (1H F21: TZS63bn; FY19: TZS43bn), restraining cash and stressed financial assets coverage of net technical liabilities within a 1x to 1.3x range (FY20: 1.2x; FY19: 1.1x). Going forward, we project liquidity metrics within the current range, supporting the stable outlook.
Tan Re continues to benefit from mandatory policy and treaty cessions from the local market, which provide a degree of revenue stability from the reinsurer’s core market. Note is also taken of a substantial amount of voluntary cessions, demonstrating the reinsurer’s competitive strength. While the reinsurer assumes a strong domestic market position, its competitive position is weakened by limited participation in other jurisdictions. Furthermore, premium diversification is constrained by limited geographic diversification, with the majority of premiums derived from Tanzania.
The Stable Outlook reflects our expectation of financial profile strength being maintained, although liquidity is likely to remain suppressed, over the medium term. The GCR CAR is expected to be maintained around 2.5x and underwriting margins could register between 8% and 10%, while liquidity coverage is expected to register within a 1.2x to 1.4x range. Furthermore, no material changes are expected in the business profile
Upward rating movement may follow a sustained improvement in earnings provided the reinsurer manages to reduce impairment risks from receivables. Conversely, negative rating pressure may stem from a worsening in asset quality, negatively impacting the financial profile.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|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, August 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Tanzania Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Claims paying ability||Initial||National||A+(TZ)||Stable||September 2008|
|Financial strength||Last||National||A(TZ)||Evolving||September 2020|
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.
Subsequent to an appeal by the rated entity, the ratings were revised as reflected in the announcement. 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 entities 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
- Full year budgeted financial statements for 2021;
- Unaudited interim results to 30 June 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.