Announcements Insurance Rating Alerts

GCR downgrades ICEA LION Tanzania’s rating to BB+(TZ) on sustained and material reduction in scale and profitability ; Outlook Negative

Rating Action

Johannesburg, 10 October 2019 – GCR Ratings (“GCR”) has downgraded ICEA LION General Insurance Company (Tanzania) Limited’s (“ICEA Lion Tanzania”) national scale financial strength (formerly claims ability) rating to BB+(TZ), Negative Outlook from A-(TZ), Negative Outlook

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
ICEA LION General Insurance Company (Tanzania) Limited Financial strength National BB+(TZ) Negative Outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for ICEA Lion Tanzania was placed ‘Under Criteria Observation’. GCR finalised the review for ICEA Lion Tanzania under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for ICEA Lion Tanzania has been revised in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

ICEA Lion Tanzania’s national scale financial strength rating downgrade reflects the sustained impact of the material loss of government related business to the national insurer in FY17. This resulted in significant losses in scale efficiencies, with corrective measures implemented to date not sufficient to restore the insurer’s business model. In this regard, very high losses from operations have been registered over the past two years, with drivers likely to persist into the medium term. In GCR’s view, very weak earnings could erode risk adjusted capitalisation and liquidity over the rating horizon, underpinning the negative outlook. These credit negatives are partially diluted by support from the ICEA Lion General group.

The insurer’s business profile shifted drastically, following the implementation of a regulation stating that all government related business should be underwritten by the National Insurance Company of Tanzania. While other players in the market were somewhat affected, the impact on ICEA Lion Tanzania was significant, given the insurer’s historic niche focus on large engineering projects, and limited scale benefits. As such, the insurer’s share of short term insurance industry premiums equated to a lower 1% in FY18, compared to 4% in FY16. Furthermore, the material loss of scale adversely impacted premium diversification, with one class of business contributing materially to revenues.  In GCR’s view, there is limited scope for the insurer’s business profile to improve over the outlook horizon, given increased competitive pressures.

Earnings registered within a very weak range, underpinned by worsening underwriting performance and a reduction in investment income. Very weak underwriting performance was largely due to the rapid deterioration of the already pressured f scale efficiencies and more recently a higher claims experience. In this regard, the insurer’s operating expense ratio equated to 111% in FY18 (FY17: 98%; FY16: 77%), while the net incurred loss ratio registered at 47% (FY17: 28%; review period average: 37%). On the other hand, investment income reduced on the back of fair value losses emanating from equities. As such, the insurer’s elevated operating expense base is viewed to entrench weak earnings over the medium term.

While risk adjusted capitalisation registered within a strong range, GCR views potential for continued erosion of the capital base to be high. The insurer’s capital base measured at USD2.3m at FY18 (FY17: USD2.9m), with a net loss of USD300m having been registered during the review year. Although some relief was provided by the concomitant drastic reduction underwriting risks and the systematic reduction in credit risk resulting in stable risk adjusted capitalisation, GCR expects risks of capital erosion from operations to increase in weight going forward. In this regard, the insurer’s capital management strategy represents a key rating consideration over the rating horizon.

Liquidity is strong, with stressed financial assets coverage of net technical provisions registering at 2.0x (FY17: 2.3x), and operational cash coverage equating to 19 months (FY17: 21months). While operational cash flow challenges are likely to persist, liquidity is likely to be supported within the current range by improved working capital management in line with industry developments.

ICEA Lion Tanzania’s rating derives support from the comparatively stronger wider ICEA LION Group, given brand alignment and shared underwriting systems, with ICEA Lion General Insurance Company Limited being the core operating entity (rated AA-(KE) by GCR). Please see the announcement on ICEA Lion General Insurance Company Limited for further details (available at: https://gcrratings.com/announcements/gcr-affirms-icea-lion-general-insurance-companys-national-scale-financial-strength-rating-of-aa-ke-outlook-stable/).

Outlook Statement

The Negative Outlook reflects expectations of further downward rating action should weak earnings be sustained and/or capital strength reduce further.

Rating triggers

The rating may be downgraded should earnings pressure be sustained. Furthermore, reduction in solvency may warrant a negative rating movement. Conversely, reversion to a stable outlook may follow stabilization in earnings at levels that maintain capitalisation and liquidity within strong ranges.

Analytical Contacts

Primary analyst Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@GCRratings.com +27 11 784 1771
Secondary Analyst Linda Matavire Insurance Associate
Johannesburg, ZA LindaM@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings

: 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, June 2019
GCR Insurance Sector Risk Scores, July 2019
ICEA LION General Insurance Company’s rating announcement, October 2019
ICEA Lion Tanzania ratings, 2006-2018

Ratings History

ICEA LION General Insurance Company (Tanzania) Limited

Rating class Review Rating scale Rating class Outlook Date
Claims paying ability Initial National A(TZ) Stable August 2006
Last National A-(TZ) Negative September 2018

Risk Score Summary

Risk scores ICEA Lion Tanzania
Operating environment 7.25
Country risk score 4.00
Sector risk score 3.25
Business profile (2.25)
Competitive position (1.25)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 1.00
Earnings (1.25)
Capitalisation 1.50
Liquidity 0.75
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
Total Score 6.5

Glossary

Accident An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Balance Sheet Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Catastrophe An event, which causes a loss of extraordinary magnitude.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
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.
Financial Flexibility The company’s ability to access additional sources of capital funding.
Income Statement A summary of all the expenditure and income of a company over a set period.
Interest Money paid for the use of money.
Investment Income The income generated by a company’s portfolio of investments.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Net Retention The amount of insurance that a ceding company keeps for its own account and does not reinsure.
Operational Risk The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
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.

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 was based solely on the merits of rated entities, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to ICEA LION General Insurance Company (Tanzania) Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

ICEA LION General Insurance Company (Tanzania) Limited participated in the rating process via face-to-face 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 ICEA LION General Insurance Company (Tanzania) Limited and other reliable third parties to accord the credit rating included:

  • Audited financial statements as at 31 December 2018;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2019;
  • Unaudited interim results to 31 August 2019;
  • Reinsurance cover for 2019; and
  • Other relevant documents.


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