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 […]