Global credit rating agency Fitch Ratings has upgraded Societe Tunisienne de Reassurance's (Tunis Re) National Insurer Financial Strength (National IFS) Rating to 'AA(tun)' from 'AA-(tun)'. The outlook is stable.
Key rating drivers
Fitch says that the upgrade of Tunis Re reflects continued improvements in its Enterprise Risk Management (ERM) framework compared with local market practices. It also takes into account the reinsurer's robust credit fundamentals relative to Tunisian peers' amid the COVID-19 pandemic, with a very strong business profile locally, strong profitability and moderate asset risk.
The company's risk-based internal capital model was reviewed by a leading international audit firm in 2020, which Fitch views positively as it brings the company's risk management practices somewhat closer to EU Solvency 2 standards in the rating agency's view, in the absence of local risk-based regulatory requirements.
The National IFS Rating reflects the leading position of Tunis Re in the Tunisian reinsurance market, as well as its strategic role within the Tunisian economy, underpinned by its strong ties with its cedants, retrocessionaires and the Tunisian state.
Fitch's assessment of the company's business profile is constrained by increasing diversification into high-risk geographies, with limited potential for expansion into sound-quality international business.
Tunis Re is highly exposed to systemic risk as most of its assets are domestic. However, investment risks are in line with Tunis Re's credit profile, and most of its domestic investments are liquid. Tunis Re is exposed to currency risk, through its business operations which are increasingly skewed towards international markets, high use of international retrocession, and an unhedged currency mismatch between assets and liabilities.
Tunis Re scored 'Strong' under Fitch's Prism factor-based capital model at end-2019, similarly to 2018, which supports the rating. Fitch does not expect capitalisation to significantly deteriorate as a result of the economic downturn caused by the pandemic. The rating agency expects regulatory capital to remain at a comfortable level, although regulatory oversight in Tunisia is somewhat under-developed.
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 of around 8% in 2015 to 2019. Fitch expects some slight deterioration in 2020, but without impairing the company's overall credit profile.
Tunis Re's earnings were adversely impacted by foreign exchange movements in 2019, reflecting increasing vulnerability to currency risk, despite a benign year for claims.