Johannesburg, 26 August 2021 – GCR Ratings (“GCR”) has upgraded ICEA LION General Insurance Company (Tanzania) Limited’s (“ICEA LION Tanzania”) national scale financial strength rating to BBB-(TZ), from BB+(TZ); Outlook Stable.
|Rated entity / issue||Rating class||Rating scale||Rating||Outlook/Watch|
|ICEA LION General Insurance Company (Tanzania) Limited||Financial strength||National||BBB-(TZ)||Stable Outlook|
The rating upgrade follows an improvement in competitiveness, which in turn facilitated a turnaround in earnings. This is further buttressed by capitalisation and liquidity assessments which are sustained within healthy ranges. We see potential for continued strength in both the competitive position and earnings, which could bolster the financial position over the medium term, underpinning the Stable Outlook.
Building on prior year strong premium growth, the underwriter’s review year gross premium base advanced considerably by 50% to close the year at TZS13.5bn, largely driven by the onboarding of new business. The said growth saw an improvement in the underwriter’s absolute market and relative market share to 2% and 0.5x (FY19: 1.3% and 0.3x), respectively, despite the entity remaining a fringe player in the local short-term insurance market. The business mix is considered fairly diversified, with three product lines materially contributing to overall GWP. Nevertheless, review year significant growth in the high retaining motor line resulted in increased dominance of motor risks in both the gross premium and net risk base, constituting 46% (FY19: 34%) and 71% (FY19: 56%), respectively. Over the rating horizon, the premium diversification assessment is expected to remain relatively unchanged, although potential exist for a gradual improvement in market position should the observed premium growth momentum be sustained over the medium to longer term.
The underwriter’s earnings profile continues to improve on the back of significant scale efficiencies attributable to strong premium growth registered since FY19. In this respect, the operating expense ratio reduced to 71% in FY20, from a peak of 111% in FY18 (FY19: 96%). This, together with the maintenance of a competitive loss ratio (FY20: 32%), supported an improvement in underwriting performance, with the associated margin equating to -6% in FY20 (FY19: -17%). Underwriting performance improvement persisted into 1H FY21, underpinned by further growth and relatively contained claims experience, with the underwriting margin crossing into the positive territory, equating to 4% (1H F20: -9%). Complementing the aforesaid turnaround is a stream of investment income, although characterised by some degree of volatility stemming mainly from the listed equity portfolio. Anchoring on favourable fair value movements, net investment income doubled to TZS704m at FY20 (FY19: TZS352m), further supporting a trend reversal in bottom-line performance. The listed equity portfolio continued to post positive returns, promoting year-on-year growth in net investment income to TZS555m at 1H F21 (1H F20: TZS376m). Accordingly, net profit after tax equated to TZS534m in 1H F21 (FY20: TZS210m profit; FY19: TZS189m loss), translating to a return on revenue of 14% (FY20: 3%; FY19: -4%). We see potential for continued earnings improvement, while noting potential volatility in net profitability, which could stem from downside risk associated with the listed equity exposure. Looking ahead, the insurer’s ability to sustain the recent turnaround in both underwriting and bottom-line performance may be positively considered in future earnings assessments.
Consistent with our expectations, risk adjusted capitalisation is assessed within a strong range, with the growth in available capital counterbalanced by a corresponding increase in aggregate risk exposures. In this respect, the GCR Capital Adequacy Ratio (“CAR”), stabilised at 1.6x at FY20 and is expected to measure within the 1.6x – 1.9x range over the rating horizon. A similar level of stability was seen in the insurer’s statutory solvency measure, which flattened at 1.1x over the past two years. In view of the observed uptrend in earnings and associated capital growth, GCR believes that the entity’s risk adjusted capitalisation could improve going forward, although remaining sensitive to rapid premium expansion without a matching increase in capital.
Liquidity remains strong, underpinned by enhanced operational cash flow generation and conservative asset allocation. However, review year growth in unearned premium reserves and net claims incurred saw liquidity and operational cash coverage ratios slightly moderating to 1.8x and 19 months at FY20 (FY19: 2.1x and 22 months), respectively. In view of continued reduction in premium receivables due to cash and carry regulation, along with the recent improvement in earnings, the insurer’s liquidity profile is expected to be sustained within a strong band over the rating outlook.
ICEA LION Tanzania’s rating derives support from its comparatively stronger majority shareholder, ICEA LION General Insurance Company Limited, given full brand alignment, operational and strategic integration.
The Stable Outlook is premised on expectations of a sustained improvement in both competitive position and earnings, which could bolster the insurer’s financial position over the rating horizon. In this respect, the underwriter’s market share is expected to measure within the 2 – 3% band over the next 12 months, while earnings are projected to be sustained within the positive territory at both underwriting and net profit level. Noting potential downside risk associated with significant premium expansion without a matching increase in capital, the Outlook further captures prospects of a gradual strengthening in risk adjusted capitalisation, with the GCR CAR expected to float within the 1.6x – 1.9x range over the outlook period.
Positive rating movement may fallow a sustained improvement in competitive position and earnings. Furthermore, a material enhancement in capitalisation may result in upward rating action. Conversely, a reversal in the developing earnings trend, adversely impacting risk adjusted capitalisation and liquidity may warrant a downward rating movement
|Primary analyst||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: 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, August 2021|
|GCR Insurance Sector Risk Scores, April 2021|
ICEA LION General Insurance Company (Tanzania) Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(TZ)||Stable Outlook||August 2006|
|Financial strength||Last||National||BB+(TZ)||Stable Outlook||August 2020|
Risk score summary
|Rating components and factors||Risk score|
|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 entity 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 statement to 31 December 2021;
- Unaudited interim results to 30 June 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.