Fitch Ratings-Paris-February 03:
Fitch Ratings has revised the Outlook on Societe Tunisienne de Reassurance's (Tunis Re) National Insurer Financial Strength (IFS) Rating to Positive from Stable and affirmed the rating at 'AA-(tun)'.
Key Rating Drivers
The Positive Outlook reflects Fitch's view that the company's enterprise risk management (ERM) practices are improving and are expected to further strengthen in the short-to-medium term. In particular, the company's reserving practices were externally reviewed by an actuarial firm for the first time in 2019, and its risk-based internal capital model is on track for third-party validation in 2020.
Tunis Re's National IFS Rating reflects its leading position in the Tunisian reinsurance market, as well as its strategic role within the Tunisian economy, underpinned by its strong ties with its cedents, retrocessionaires and the Tunisian state. Our assessment of the company's business profile is mostly constrained by an increasing diversification into risky international markets, with limited potential for expansion into sound quality international business.
The company is highly exposed to systemic risk as most of its assets are domestic. However, the asset allocation is in line with Tunis Re's credit profile, and most of its domestic investments are liquid. Tunis Re is exposed to currency risk, with an unhedged currency mismatch between assets and liabilities.
Tunis Re scored 'Strong' under Fitch's Prism factor-based capital model at end-2018, indicating a strong capital base relatively to its risk profile. However, we believe regulatory oversight in Tunisia is somewhat underdeveloped. Tunis Re has developed an in-house full risk-based internal model, and is aiming for a validation by a well-established international firm, which Fitch believes would be credit-positive from an ERM perspective.
Fitch believes Tunis Re's earnings are strong for the rating, with a five-year weighted average reported combined ratio slightly below 100% and a five-year average return on equity (ROE) of over 8% in 2014 to 2018. However, Tunis Re's earnings are increasingly vulnerable to foreign-exchange movements, as it continues to expand internationally in risky markets, which could induce more volatility. The company is also vulnerable to adverse financial market conditions or higher retrocession costs.
Fitch believes Tunis Re's retrocession programmes are effective, supporting sound risk management policies, as the company has developed strong business ties with a panel of highly-rated international reinsurers, while maintaining a strong retention ratio. Exposure to catastrophe risk is manageable, and largely retroceded.
The rating could be upgraded if Tunis Re continues to demonstrate improvements in its ERM framework, while maintaining its overall financial performance and capital strength at current levels.
The Outlook could be revised to Stable if there is evidence that the company might not deliver on its ERM improvement strategy.
Societe Tunisienne De Reassurance; National Insurer Financial Strength; Affirmed; AA-(tun); RO:Pos
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Secondary Rating Analyst
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Additional information is available on
Insurance Rating Criteria (pub. 18 Nov 2019)
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