Announcements Insurance Rating Alerts

GCR affirms MUA Insurance (Uganda) Limited’s national scale financial strength rating of A(UG); Outlook Stable.

Rating action

Nairobi, 13th July 2021 – GCR Ratings (“GCR”) has affirmed MUA Insurance (Uganda) Limited’s
(“MUA Uganda”) national scale financial strength rating of A(UG), with the Outlook maintained as Stable.

Rated entity / Issue Rating class Rating scale Rating Outlook/Watch
MUA Insurance (Uganda) Limited National National A(UG) Stable Outlook

Rating rationale

MUA Uganda’s rating reflects a sound financial profile, supported by strong risk adjusted capitalisation and liquidity, offsetting high earnings risk and a limited business profile. The rating also derives upliftment for parental support from its ultimate parent; MUA Ltd, through MUA Insurance (Kenya) Limited (“MUA Kenya”), the sub-group.

The insurer’s risk adjusted capitalisation represents a key credit strength, underpinned by consistent internal capital generation over the review period and nil dividend pay-outs, which offset increases in risk exposures. In this respect, the capital base increased to UGX15.5m (FY16: UGX10m). The statutory CAR also showed an improvement to 197% (FY19: 176%). Going forward, GCR expects the metrics to be sustained at similar levels, underpinned by consistent earnings support from investment income.

Liquidity was sustained at strong levels although a contraction was noted. As such, cash and stressed assets coverage of net technical liabilities registered a slight moderation to 1.9x (FY19: 2.0x) due to cash absorption by reinsurance receivables. Similarly, operational cash coverage moderated to 12 months (FY19: 15 months), pressured by a spike in operating expenses from a relatively sizeable one-off cost. Liquidity metrics are expected to be sustained above 1.5x over the near term, supported by high exposure to liquid assets.

Earnings at underwriting level remained a key weakness in the financial profile, caused by the entity’s relatively high operating expenses. This is demonstrated by an inhibitive operating expense ratio averaging around 59% over the review period. As such, the five-year underwriting margin registered at around -5%. These pressures worsened in FY20 resulting to an underwriting margin of -7.1% (FY19: 0.7%), though this was mainly attributed to non-recurring administration expenses and liability claims related to the Covid 19 pandemic. Positively, earnings are uplifted by sustainable investment income, resulting in an average return on revenue of about 11%. Looking ahead, underwriting pressures are expected to continue over the near-term, offset by sound investment income.

The competitive position remained intermediate, mainly supported by stable relationships with brokers and agents. The insurer, therefore, managed to retain its market share and relative market share of 3.2% and 0.7x respectively. Three lines of business contribute materially to gross premiums, with a notably higher concentration to the motor book. In the near-term, the entity’s business profile is expected to be maintained at similar levels.

The insurer is the subsidiary of the MUA group domiciled in Mauritius. The rating took into consideration MUA Uganda’s relevance to the subgroup as well as evidence of operational integration and brand alignment with both its subgroup and ultimate parent.

Outlook statement

The Stable Outlook reflects our expectations of strong risk adjusted capitalisation and liquidity, supported by the net income and a conservative asset allocation, offsetting underwriting pressures. Concurrently, the business profile is expected to remain at similar levels.

Rating triggers

Positive rating action may result from a material strengthening in earnings, especially if that can improve capital built. Conversely, downward rating action may ensue if earnings deteriorate significantly or persistent collection pressures impact liquidity beyond expectations.

Analytical contacts

Primary analyst David Mungai Analyst: Insurance Ratings
Nairobi, KE DavidM@GCRratings.com +254 73 218 8669
Committee chair Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Insurance Companies, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, July 2021
GCR Insurance Sector Risk Scores, April 2021

Ratings history

MUA Insurance (Uganda) Limited

Rating class Review Rating scale Rating class Outlook Date
Claims paying ability Initial National A(UG) Stable April 2012
Financial strength Last National A(UG) Stable August 2020

Risk score summary

Rating components and factors Risk scores
Operating environment 7.00
Country risk score 3.25
Sector risk score 3.75
Business profile (1.50)
Competitive position (0.75)
Premium diversification (0.75)
Management and governance 0.00
Financial profile 1.75
Earnings (0.75)
Capitalisation 1.50
Liquidity 1.00
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
Total Score 7.75

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
Underwriting The process of selecting risks and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
Premium The price of insurance protection for a specified risk for a specified period of time.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Reinsurance The practice whereby one party, called the Reinsurer, in consideration of a premium paid to him agrees to indemnify another party, called the Reinsured, for part or all of the liability assumed by the latter party under a policy or policies of insurance, which it has issued. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securities Various instruments used in the capital market to raise funds.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the entity and other reliable third parties to accord the credit ratings included:

  • Draft financial statements as at 31 December 2020;
  • Four years of comparative audited financial statements to 31 December.
  • Full year budgeted financial statements for 2021.
  • Unaudited interim results to 31 March 2021.
  • Reinsurance cover notes for 2021; and
  • Other relevant documents.


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