Johannesburg, 3 October 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to The Heritage Insurance Company Tanzania Limited of AA-(TZ), with the outlook accorded as Stable. The rating is valid until September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to The Heritage Insurance Company Tanzania Limited (“Heritage Tanzania”) based on the following key criteria:
Heritage Tanzania reflects very strong risk adjusted capitalisation, underpinned by sound historical internal capital generation, and more recently capital injections, supporting moderately elevated market risk exposures. Accordingly, the international solvency margin (excluding dividends and aged debtors) equated to a high 96% at FY16 (FY15: 90%; review period average: 110%). While the capital base is likely to reduce on the back of continued dividend distributions, GCR expects risk adjusted capitalisation to register within a very strong range, underpinned by a reduction in underwriting risk (given expected premium contractions).
Earnings capacity, which had strengthened to a moderately strong level over the last two years, is likely to register within a moderately weak range, over the outlook horizon, on the back of deteriorating underwriting results, in tandem with softened investment returns. In this respect, underwriting margins are likely to register within a moderately weak range (-5% to -10%), on the back of reduced scale efficiencies (given expected premium contractions), and unfavourable claims experience. This compares to the two year underwriting margin of 9% (FY16: 12%; FY15: 6%). Investment returns are likely to be impacted by reduced interest rates, with the operating margin likely to register below 12% over the rating horizon (review period average: 27%). Nevertheless, very strong capitalisation allows for the absorption of earnings volatility over the rating horizon. Furthermore, reinsurance agreements limit maximum deductibles to conservative levels against capital, supported by sound aggregate counterparty credit strength.
Key liquidity measures remained at strong levels. In this respect, claims cash coverage equated to 45 months at FY16 (FY15: 31 months; FY14: 32 months), while cash covered net technical liabilities by 2.0x at FY16 (FY15: 1.4x). Liquidity metrics are likely to remain within a strong range over the outlook horizon, supported by conservative asset allocation.
The insurer’s share of short term industry gross premiums remained relatively stable at 8% in FY16 (FY15: 9%), supported by strong brand recognition and well entrenched client relationships. Similarly Heritage Tanzania’s relative market share remained stable at FY16, equating to 2.0x (FY15: 2.2x). While GCR expects the insurer to remain a top tier player, cognisance is taken of likely premium contractions, on the back of new cash and carry regulations, in conjunction with continued economic challenges.
Earnings are skewed towards one line of business, representing more than 40%, with three other lines of business contributing more than 10% of premiums. Management aims to enhance revenue and risk base diversification over the medium term, by targeting retail business and personal lines.
The rating currently matches the national scale ceiling applicable to entities operating within the Tanzanian short term industry. As a result, upward movement of the rating may follow an assessment of country and industry risk factors. The rating may be downgraded if the insurer were to evidence a sustained weakening in earnings capacity, a reduction in risk adjusted capital adequacy, and/or a weakening in liquidity metrics.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (June 2007)|
|Claims paying ability: AA- (TZ)|
|Last rating (September 2016)|
|Claims paying ability: AA-(TZ)|
|Primary Analyst||Secondary Analyst|
|Yvonne Mujuru||Zwivhuya Mukosi|
|Sector Head: Insurance Ratings||Junior Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Senior Credit Analyst|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Heritage Tanzania rating reports, 2007-2016
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/RATING-SCALES-DEFINITIONS. 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 was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The Heritage Insurance Company Tanzania 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 rating has been disclosed to The Heritage Insurance Company Tanzania Limited with no contestation of the rating.
The information received from The Heritage Insurance Company Tanzania Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 July 2017
- Budgeted financial statements for 2017
- 2017 reinsurance cover notes
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
|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 more detailed glossary of terms, please click here
GCR affirms The Heritage Insurance Company Tanzania Limited’s rating of AA-(TZ); Outlook Stable.