Johannesburg, 11 October 2017 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Tanzania Reinsurance Company Limited to A(TZ) from A+(TZ), with the rating outlook accorded as Stable. Furthermore, Global Credit Ratings has downgraded the international scale claims paying ability rating assigned to Tanzania Reinsurance Company Limited to B from B+, with the outlook accorded as Stable. The ratings are valid until September 2018.
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 criteria:
The downgrade is on the back of highly suppressed liquidity, while simultaneously noting high sensitivity of liquidity, capitalisation and earnings capacity to very low reserving metrics (compared to cedant and regional norms). The latter may serve to dilute capital strength, and potentially offset any benefits of expected short to medium term capital injections upon foreseeable reserve corrections. The rating also factors in upliftment from shareholder support.
The national scale rating is constrained by very weak liquidity, with cash coverage of average monthly claims and net technical reserves remaining low at 3 months and 0.4x respectively at FY16. Cognisance is also taken of the high sensitivity of liquidity to very low reserving (compared to cedant and regional norms). Between FY14 and FY15, significant cash resources were utilised in developing investment property, and more recently, cash was also redirected towards strategic investments in associates. As a result, the FY16 cash balance of TZS9.6bn was notably below the TZS24.2bn registered at the start of the review period. Management have indicated that all funds will be allocated to cash going forward (including potential capital injections), while improved premium collections (through regulatory mechanisms) may also enhance cash flow generation. However, over the rating horizon, scope for material improvement in liquidity is viewed to be limited, factoring in sensitivity to reserve exposure, with potential technical provision adjustments likely to feed through.
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 80% in FY16 (FY15: 79%), while in a stress test scenario, the adjusted margin drops to 71%. Risk adjusted capital strength is underpinned by the sizeable capital base, catering for the quantum of insurance and market risk exposures, while review period capital build has been supported by consistent capital injections (cumulatively amounting to TZS9bn), augmenting reasonable net profitability. Risk adjusted capital adequacy is likely to be maintained at a moderately strong level over the rating horizon, noting potential for further capital injections of USD1m (TZS2.1bn) by the end of FY17.
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. On the negative side, high concentration of local business increases systematic risks, as evidenced by the premium collection challenges faced by cedants over the past two years, which resulted in a rise in Tan Re’s aged debtors.
Earnings capacity is viewed to be intermediate. Tan Re has consistently reported underwriting profits, albeit at fairly subdued levels (FY16 underwriting margin of 3%; five year average: 3%). A key factor contributing to underwriting profitability is well contained operating costs, with the operating expense ratio registering at a low 15% in FY16 (FY15: 15%; five year average: 14%). Going forward, profitability metrics are expected to mirror the review period trend, supportive of an intermediate level of earnings. Furthermore, the reinsurer’s treaty 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 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 constrained by the fact that all of the reinsurer’s liquid assets are domiciled in Tanzania, which implies concentrated sovereign risk. Tanzania has not been accorded a sovereign credit rating.
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 ongoing 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 2016)|
|Claims paying ability: A+(TZ)|
|INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2008)|
|Claims paying ability: BB-|
|Last rating (September 2016)|
|Claims paying ability: B+|
|Sector Head: Insurance Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Criteria for Rating Long Term Insurance Companies, updated July 2017
Tan Re rating reports, 2008-2016
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. 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 ratings were 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 with no contestation of the ratings.
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 2016
- Four years of comparative audited financial statements
- Full year budgeted financial statements to 31 December 2017
- Unaudited interim results to 30 June 2017
- Other relevant documents
The ratings above were solicited by, or on behalf of, the rated client, 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
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Benefits||Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cession||Amount of the insurance ceded to a reinsurer by the original insuring company (cedant) in a reinsurance transaction.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Downgrade||The assignment of a lower credit rating to an insurer by a credit rating agency. Opposite of upgrade.|
|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 LC||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.|
|International Solvency Margin||Measures the ability to cover current year’s written premiums using shareholder’s funds.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|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.|
|Operating Expense Ratio||Measures the proportion of operating expenses in net premiums earned.|
|Outstanding Claims Reserve||A technical reserve of an insurance company established to provide for the future liability for claims which have occurred and have been reported but which have not yet been settled.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Retrocession||The transaction whereby a reinsurer cedes to another reinsurer all or part of the reinsurance it has previously assumed.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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 downgrades Tanzania Reinsurance Company Limited’s rating to A(TZ); Outlook Stable.