Johannesburg, 9 October 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Tanzania Reinsurance Company Limited of A(TZ), with the rating outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating assigned to Tanzania Reinsurance Company Limited of B, with the outlook accorded as Negative. The ratings are valid until September 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Tanzania Reinsurance Company Limited (“Tan Re”) based on the following key factors:
Tan Re’s earnings capacity registered within a strong range over the last three years, 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 three years, while the aggregated three year average loss ratio equated to 58%. Accordingly, the three average underwriting margin registered at 4% (FY17: 5%). Over the rating horizon, earnings capacity is likely to replicate the recent three year trend, supporting the assessment of earnings capacity within a strong range. Notwithstanding the aforementioned likelihood for continued earnings strength, note should be taken of earnings sensitivity to potential reserve adjustments over the medium term.
Risk adjusted capitalisation remained moderately strong, albeit viewed to be susceptible to potential reserving adjustments over the medium term. In this regard, the international solvency margin equated to 82% in FY17 (FY16: 80%), while in a reserving stress test scenario, the adjusted margin drops to 73%. Risk adjusted capital strength is underpinned by a sizeable capital base, catering for the quantum of insurance risk and market exposures, while review period capital build has been largely supported by significant profit retention, along with capital injections. The maintenance of a large capital base, coupled with the potential for further capital injection (amounting to USD5m) is likely to sustain the assessment of risk adjusted capitalisation at a moderately strong level over the rating horizon. Furthermore, the retrocession programme is predominantly placed with well rated entities, whilst net deductibles on XoL per risk and event remain reasonably contained relative to capital.
Tan Re’s position as the only domestically registered reinsurer in Tanzania is viewed positively. The reinsurer 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. Nevertheless, Tan Re’s relatively high concentration to the local business environment increases contagion risk, as evidenced by premium collection challenges faced by cedants over the past few years, which has resulted in a deterioration in the reinsurer’s debtors’ book, and subsequent impairment of certain receivables.
Sound operational cash flow generation and a higher cash balance of TZS14.3bn (FY16: TZS9.6bn) saw liquidity metrics rebound, with cash coverage of net technical provisions and average monthly claims registering at a higher 0.6x and 4.5 months respectively (FY16: 0.4x and 3.1 months). Cognisance is further taken of the sensitivity of liquidity to potential reserve adjustments given very low reserving metrics (compared to cedant and regional norms). Looking ahead, premium collection is expected to improve following regulatory intervention, with management underscoring their plan to invest premium collection proceeds in liquid instruments, supporting liquidity metrics. Nevertheless, the scope for material improvement in liquidity is viewed to be limited over the rating horizon, factoring in sensitivity to potential technical provision adjustments, which are likely to feed through.
Tan Re is viewed to reflect very low reserving metrics relative to both the cedant market, as well as regional norms. In this respect, the ratio of net outstanding claims reserves remained low at 6% of NWP in FY17 (in line with the review period average). Accordingly, low reserving metrics continue to represent a source of capital, liquidity and earnings risk.
Tan Re is viewed to reflect very low reserving metrics relative to both the cedant market, as well as regional norms. In this respect, the ratio of net outstanding claims reserves remained low at 6% of NWP in FY16 (in line with the review period average). Accordingly, low reserving metrics continue to represent a source of capital, liquidity and earnings risk.
The international rating remains impacted by Tanzania’s sovereign rating, given that the majority assets are domiciled locally, and the bulk of revenue is sourced domestically.
Positive rating action may develop on the back of a sustained and material improvement in liquidity, accompanied by the maintenance of risk adjusted capitalisation at strong levels. This must be accompanied by sustained enhanced earnings capacity. Downward rating pressure could result from sustained liquidity suppression, coupled with a weakening in risk adjusted capital and earnings capacity due to potential reserving corrections.
NATIONAL SCALE RATINGS HISTORY
Initial rating (September 2008)
Claims paying ability: A+(TZ)
Last rating (September 2017)
Claims paying ability: A(TZ)
INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (September 2008)
Claims paying ability: BB-
Last rating (September 2017)
Claims paying ability: B
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Criteria for Rating Long Term Insurance Companies, updated May 2018
Tan Re rating reports, 2008-2017
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 process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Tanzania Reinsurance 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 ratings have been disclosed to Tanzania Reinsurance Company Limited.
The information received from Tanzania Reinsurance Company Limited and other reliable third parties to accord the credit ratings included:
The audited financial statements to 31 December 2017
• Four years of comparative audited financial statements
• Full year budgeted financial statements to 31 December 2018
• Unaudited interim results to 30 June 2017
• 2018 Reinsurance cover notes
• Other relevant documents
The ratings above were solicited by, or on behalf of the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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 Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here.
GCR affirms Tanzania Reinsurance Company Limited’s rating of A(TZ); Outlook Stable.