Announcements Insurance Rating Alerts

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

Rating Action

Johannesburg, 5 December 2019 – GCR Ratings (“GCR”) has affirmed MUA Insurance (Uganda) Limited’s (“MUA Uganda”) (formerly Phoenix of Uganda Assurance Company Limited) national scale financial strength (formerly claims ability) rating of A(UG), with a Stable Outlook.

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

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for MUA Uganda was placed ‘Under Criteria Observation’. GCR finalised the review for MUA Uganda under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for MUA Uganda has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The rating of MUA Uganda reflects the entity’s moderately strong financial profile, supported by strong risk adjusted capitalisation and healthy liquidity, albeit partially offset by volatile earnings. Furthermore, the insurer’s business profile evidences comparatively limited competitive positioning and premium diversification. Overall MUA Uganda’s rating derives upliftment from implied parental support, given a level of operational integration and strategic alignment.

Risk adjusted capitalisation has been maintained at strong levels, underpinned by well contained insurance and market risk exposures. Cognisance is taken of the low capital base relative to other industry players, which moderates the insurer’s capitalisation assessment. Liquidity has been assessed as strong, with coverage of net technical liabilities by cash and stressed financial assets registering at 2.0x, while operational cash coverage equated to 13 months. Liquidity strength is expected to remain at similar levels going forward, supported by sound investment income and conservative asset allocation. Earnings capacity is viewed to be intermediate, with weak and volatile underwriting performance being partially offset by high investment returns. In this regard, the five year underwriting margin registered at -6% (FY18: -10%; FY17: -11%; FY16: 4%) while the corresponding return on revenue equated to 10% (FY18: 6%; FY17: 8%). Earnings are expected to remain at similar levels reflective of low scale efficiencies on the backdrop of relatively limited loss ratio control and reliance on investment income.

Furthermore, the business profile is constrained by limited competitive positioning and premium spread. MUA Uganda’s market share registered around 3% over the past four years, with one line of business contributing materially to the risk base while all premiums were derived from one market. Note is, however, taken of management’s efforts to improve the business profile through revamping the sales team and expanding market breadth and depth, supported by the rebranding exercise.

Outlook Statement

The stable outlook reflects expectations of stability in risk adjusted capital and liquidity, with the business profile likely to remain within the current range over the outlook horizon.

Rating triggers

Positive rating action may stem from a sustainable strengthening in earnings and a material improvement in the business profile while all other credit protection metrics remain within strong to very strong ranges. Conversely, downward rating pressure may arise from a material or sustained deterioration in earnings and/or liquidity.

Analytical Contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance Ratings
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Secondary analyst Linda Matavire Insurance Associate
Johannesburg, ZA LindaM@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@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, June 2019
GCR Insurance Sector Risk Scores, November 2019
Phoenix of Uganda Assurance Company Limited rating reports, 2012-2018

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
Last National A(UG) Stable October 2018

Risk Score Summary

Risk scores MUA Insurance (Uganda) Limited
Operating environment 7.25
Country risk score 3.50
Sector risk score 3.75
Business profile (1.75)
Competitive position (1.00)
Premium diversification (0.75)
Management and governance 0.00
Financial profile 2.25
Earnings (0.50)
Capitalisation 1.50
Liquidity 1.25
Comparative profile 0.50
Group support 0.50
Government support 0.00
Peer analysis 0.00
Total score 8.25

Glossary

Accident An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Balance Sheet Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capacity The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.
Capital The sum of money that is invested to generate proceeds.
Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Cash Funds that can be readily spent or used to meet current obligations.
Catastrophe An event, which causes a loss of extraordinary magnitude.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
Financial Flexibility The company’s ability to access additional sources of capital funding.
Income Statement A summary of all the expenditure and income of a company over a set period.
Interest Money paid for the use of money.
Investment Income The income generated by a company’s portfolio of investments.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
Liquidity The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Net Retention The amount of insurance that a ceding company keeps for its own account and does not reinsure.
Operational Risk The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
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.

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 was based solely on the merits of rated entities, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of MUA Insurance (Uganda) Limited, security or financial instrument.

The credit rating has been disclosed to MUA Insurance (Uganda) Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

MUA Insurance (Uganda) Limited participated in the rating process via face-to-face 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 MUA Insurance (Uganda) Limited and other reliable third parties to accord the credit rating included:

  • Audited financial statements as at 31 December 2018;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2019;
  • Unaudited interim results to 31 July 2019;
  • Reinsurance cover for 2019; and
  • Other relevant documents.
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