The credit fundamentals of Societe Tunisienne de Reassurance (Tunis Re) were robust in 2020 despite the coronavirus pandemic and two major exceptional claims, including the August 2020 Beirut explosion, notes Fitch Ratings. The global credit rating agency expects the company's fundamentals will remain robust in 2021.
Tunis Re has demonstrated continued resilience to shocks through challenging years for global reinsurance, depreciation of the Tunisian dinar, and the 2011 social uprising in Tunisia. This was due largely to the company's sound management, low-risk appetite, sound-quality retrocessionaires, and strong ties with its cedants and the Tunisian state.
Fitch has affirmed Tunis Re's National Insurer Financial Strength (National IFS) Rating at 'AA(tun)'. The rating outlook is stable.
The National IFS Rating reflects the leading position of Tunis Re in the Tunisian reinsurance market, as well as its strategic role within the economy of Tunisia, underpinned by its strong ties with its cedants, retrocessionaires and the Tunisian state, says Fitch.
The agency's assessment of the company's business profile, though, 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, says Fitch. However, investment risks are in line with its credit profile, and most of its domestic investments are liquid. Tunis Re is exposed to currency risk, through its business operations that are increasingly skewed towards international markets, high use of international retrocession, and an unhedged currency mismatch between assets and liabilities.
The reinsurer scored 'Adequate' under Fitch's Prism Factor-Based Capital Model at end-2020, compared with 'Strong' at end-2019, albeit still supporting the rating. This slight deterioration was due to multiple factors, including a 2021 planned dividend payment, after COVID-19 restrictions resulted in no dividend in the previous year. Other factors which affected Prism for Tunis Re are a wider currency mismatch between assets and liabilities versus 2019, mostly due to some reserve strengthening amid 2020 exceptional claims, and a higher retained catastrophe risk. Fitch expects Prism to remain 'Adequate' in 2021, and regulatory capital to remain at a comfortable level, although regulatory oversight in Tunisia is fairly under-developed.
Fitch believes Tunis Re's earnings are strong for the rating, with a five-year average reported combined ratio of around 100% and an average return on equity of 7% in 2016-2020. Tunis Re's earnings were robust in 2020 despite some exceptional non-Covid-19 related claims, and pressures from the pandemic. Fitch expects earnings to remain robust in 2021.
The agency believes Tunis Re's retrocession programmes are effective, supporting sound risk management policies, as the company has developed strong business ties with highly rated international reinsurers, while maintaining an adequate retention ratio. Exposure to catastrophe risk is manageable for the company and largely retroceded, despite some increased net exposure in 2021 due to challenging retrocession renewals amid exceptional 2020 claims.