Johannesburg, 27 September 2021 – GCR Ratings (“GCR”) has affirmed The Heritage Insurance Company Tanzania Limited’s (“Heritage Tanzania”) national scale financial strength rating of AA(TZ), with a Stable Outlook.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|The Heritage Insurance Company Tanzania Limited||Financial strength||National||AA(TZ)||Stable Outlook|
Heritage Tanzania’s national scale financial strength rating balances its strong financial profile with a limited business profile. The former is largely supported by very strong capitalisation and liquidity while the latter is constricted by moderate levels of premium diversification.
Risk adjusted capitalisation is assessed at very strong levels, supported by a capital base that comfortably caters for insurance and market risk exposures. Note is taken that the insurer did not pay out dividends in the year under review, addressing the concern of continued capital reduction as a result of dividend extraction. As such, the capital base measured at TZS15.8bn at FY20 (FY19: TZS14.9bn; FY16: TZS17.6bn). As a result, the GCR capital adequacy ratio (“GCR CAR”) closed higher at 2.6x at FY20 (FY19: 2.3x). Heritage Tanzania’s regulatory solvency has been maintained above the regulatory requirement over the review period. Going forward, risk adjusted capitalisation is anticipated to remain within a similar range, supported by profit retention and contained exposure to underwriting risks.
Heritage Tanzania’s liquidity profile has been maintained within a very healthy range, underpinned by a sizeable and conservatively invested asset portfolio. Accordingly, cash and stressed financial assets coverage of net technical liabilities stabilised at 3.8x at FY20, while operational cash coverage registered at 26 months (FY19: 29 months). GCR expects liquidity metrics to remain within a similar range over the outlook horizon, considering the insurer’s relatively low cash requirements compared to accumulated liquidity reserves.
Earnings are moderately strong, supported by sound investment income. Note is taken of suppressed and volatile underwriting profitability due to the insurer’s operating cost structure. In this respect, the five-year underwriting margin equated to 3% (FY20: -6%; FY19: 5%), while the return on revenue for the corresponding period registered at 14% (FY20: 6%; FY19: 14%). We expect earnings to be maintained within a similar range over the short term, although a recovery is possible over the medium term on the back of competitive risk selection, coupled with supportive regulations on premium rates, as well as cash and carry policies.
The insurer’s competitive position remained moderately strong, anchored by strong brand recognition and entrenched market relationships. Note is taken of review year slight decline in gross premiums, in line with the industry. In this regard, Heritage Tanzania accounted for a stable 7.9% of the local short term insurance industry premiums in FY20. The factor assessment is expected to remain within a similar band over the medium term, given expectations of limited premium growth due to current economic conditions. Furthermore, premium diversification remained constrained by single market focus, offsetting healthy product diversification, with the latter reflecting three lines of business contributing materially to gross premiums.
The Stable Outlook reflects expectations of sustained financial profile strength, factoring in the likelihood of continued earnings suppression in the short term as a result of limited premium growth and elevated total costs. Capitalisation and liquidity metrics are expected to tolerate the level of earnings pressure anticipated over the next 12 months. As such, the GCR CAR is likely to remain above 2.0x, while the liquidity ratio may continue to measure above 3.0x. Furthermore, no material changes are expected in the business profile over the rating horizon.
Upward rating movement may follow a sustained improvement in earnings capacity and business profile while other credit protection metrics are maintained within strong ranges. Conversely, negative rating pressure may stem from a material reduction in earnings capacity.
|Primary 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, August 2021|
|GCR Insurance Sector Risk Scores, April 2021|
The Heritage Insurance Company Tanzania Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||AA-(TZ)||Stable||June 2007|
|Financial strength||Last||National||AA(TZ)||Stable||August 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 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 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 31 August 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.