Johannesburg, 9 September 2020 – GCR Ratings (“GCR”) has affirmed Tanzania Reinsurance Company Limited’s (“Tan Re”) national scale financial strength rating of A(TZ), with an Evolving Outlook. Furthermore, Tan Re’s international scale financial strength rating has been affirmed at B-, with the outlook accorded as Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Tanzania Reinsurance Company Limited||Financial strength||International||B-||Negative Outlook|
Tan Re’s national scale rating has been placed on Evolving Outlook reflecting potential changes in the credit profile, contingent on management’s success in implementing institutional measures to improve liquidity. Tan Re’s liquidity has been maintained within a moderately weak range due to worsening exposure to premium receivables, resulting in depressed liquidity metrics. Cognisant of this, management signed new terms of trade with cedants on the 1st of January 2020 that could result in reduced cash absorption by premium receivables. In GCR’s view, this development could curtail the depressed trend in liquidity depending on the level of management’s success. As such, the ratings are sensitive to the response of liquidity metrics to the aforesaid initiatives, albeit with the financial profile largely supported by sound capitalisation and moderately healthy earnings, while the business profile is expected to remain comparatively limited.
Liquidity was sustained within a moderately weak range, with cash and stressed financial assets coverage of net technical liabilities measuring at 1.1x (FY18: 1.2x), while operational cost coverage remained unchanged at 3 months at FY19. The depressed metrics are on the backdrop of very low reserving metrics relative to both the cedant market, as well as regional norms, increasing downside risks to liquidity. In this respect, the ratio of net outstanding claims reserves to NWP remained low at 9% in FY19 (review period average: 7%). Accordingly, low reserving metrics versus peers continue to represent a source of capital, liquidity and earnings risk, in our opinion. Furthermore, GCR views negatively the consistently high levels of premium receivables, adversely impacting liquidity metrics. Note is however taken of the reinsurer’s efforts to improve debtors’ collection. Continued progress in this regard is positively viewed.
Risk adjusted capitalisation remained strong, supported by a sizeable capital base, catering for the level of insurance and market risk exposures. Tan Re’s capital base maintained an upward growth trend, registering a compound annual growth rate of 10% over the review period. Capital build has been largely supported by sound profit generation and significant profit retention. In this regard, the GCR capital adequacy ratio (“CAR”) consistently registered above 2x over the last five years. Note is, however, taken of the susceptibility of capitalisation to potential reserving adjustments over the medium term.
Tan Re’s earnings registered within a sound range over the review period, underpinned by a well contained operating cost structure, a fairly stable claims ratio and sound investment returns. In this respect, the operating expense ratio averaged 16% over the last five years, while the aggregated loss ratio equated to 59% over the same period. Accordingly, the five-year average underwriting margin registered at 5% (FY19: 8%). Healthy investments returns continued to support underwriting profitability, resulting in the return on revenue averaging 7% over the review period (FY19: 8%). GCR expects earnings to follow the same trend over the rating horizon, supporting the assessment of earnings within a sound range. Notwithstanding the aforementioned likelihood for continued earnings strength, note should be taken of earnings sensitivity to the weakening economic environment as a result of the COVID-19 pandemic.
Tan Re continues to benefit from mandatory policy and treaty cessions from the local market, which provides a degree of revenue stability from the reinsurer’s core market. While the reinsurer assumes a strong domestic market position, competitive positioning 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 Evolving Outlook reflects potential for the ratings to be downgraded if liquidity coverage stabilises below 1.4x over the next 3 to 12 months. On the other hand, positive rating action may follow should Tan Re’s receivables collection measures result in the maintenance of the liquidity ratio above 1.6x. The Outlook further captures the risk associated with low reserving and the impact thereof on earnings, liquidity and capitalisation.
The international scale rating is unlikely to be upgraded over the medium term and the national scale rating could be upgraded if the reinsurer demonstrates capacity to sustain the liquidity ratio above 1.6x. The ratings may revert to Stable Outlook if the liquidity ratio is managed within a range of 1.4x to 1.6x. Conversely, the ratings may be downgraded should Tan Re’s liquidity ratio measure below 1.4x. Furthermore, downward pressure may arise from a change in the assessment of reserving adequacy, negatively impacting earnings, capitalisation and liquidity.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SylviaM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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|
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)||Stable||December 2019|
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