In its recent report, the Johannesburg based agency said the rating rationale for Jubilee Tanzania is supported by moderately strong risk adjusted capitalisation and competitive position, as well as healthy earnings capacity.
“Offsetting these strengths is limited liquidity, due to high exposure to reinsurance receivables, and low premium diversification. The rating derives uplift from implied group support given the insurer’s history of performance and high levels of assimilation within the Jubilee Holdings Limited group,” the GCR report stated.
The report further noted that the risk adjusted capitalisation assessment reflects expected support from internal capital generation, countering short term risks from the coronavirus pandemic. “The GCR Capital Adequacy Ratio measured at 1.6x at financial year 2019 compared to FY18 at 1.8x, reflecting pressure from underwriting and credit risk exposures. Retention of all earnings (prior four year average dividend pay-out: 32 percent) is expected to support a rebound in the metric to 1.8x in FY20, factoring in an expected modest impact from COVID-19 pandemic risks,” the report added.
However, exposure to reinsurance receivables (70 percent of FY19 capital) reduces the asset quality assessment and is viewed to be credit negative. Despite a cash and carry environment, Jubilee Tanzania’s liquidity assessment remained within a limited range, due to the aforesaid cash extraction from dividend payments and working capital absorption from reinsurance receivables, the GCR noted.
“In this regard, cash and stressed assets covered net technical liabilities by 1.6x (FY18: 1.3x; FY17: 1.5x), whilst the duration of the dividend reprieve instituted in FY20 and consistence in executing working capital management enhancement measures could sustain the metric above 1.5x over the medium term,” the rating agency noted.
The report further added that earnings have been maintained within a healthy range, with increased focus on improving the risk portfolio’s quality expected to enhance medium term profitability. The insurer registered a stable underwriting margin of 11 percent in FY19 (FY18: 10 percent; FY15-FY17 average: 7 percent), driven by a gradual reduction in the loss ratio, the report explained.
“This was mainly due to better loss control in motor and medical lines, on the back of risk selection and portfolio cleaning efforts. However, earnings are sensitive to an increase in the total expense ratio and compression in investment yields (FY19: 5 percent; FY17: 10 percent ), as well as exposure to potential COVID-19 related claims,” the GCR report warned.
In this respect, earnings management through the current transition to a higher cycle is a key rating input over the medium term. Jubilee Tanzania’s moderately strong competitive position is rating positive, although concerted portfolio cleaning efforts could moderate market leadership position over the medium term, the GCR suggested.
The insurer is the largest short term insurer in the domestic market, accounting for 13.5 percent (FY18: 15.4 percent) of gross premiums and a relative market share of 3.4x in FY19. This derives from long standing market relationships and an expansive business network, the report stated.
“However, increased focus on improving the quality of the medical book and enhanced process diligence compounded ongoing premium losses in the motor line due to selective underwriting, slowing review year premium growth to 5 percent against an industry average of 19 percent. Going forward, the insurer’s market position is likely to be diluted in line with increasing competitive dynamics in the market and increasing focus on the quality of the book,” the Johannesburg based rating agency which is part of an African arm of New York Stock Exchange listed Duff & Phelps noted in its report.
The report concluded that premium diversification is fairly balanced among four lines of business at gross level, with lower risk appetite on accident narrowing the risk base to three significant lines. “The client base is corporate centric, albeit with the largest and top five clients accounting for two percent and eight percent of gross premiums respectively, evidencing policy granularity,” the report added saying the insurer’s single market focus, though limiting the factor’s assessment, is viewed in the context of the regionalisation strategy of the group.