Rating action

Johannesburg, 12 August 2020 – GCR Ratings (“GCR”) has affirmed MUA Insurance (Uganda) Limited’s (“MUA Uganda”) national scale financial strength rating of A_(UG), with a Stable Outlook.

Rating rationale

The rating of MUA Uganda is underpinned by the entity’s moderately strong financial profile, which offsets a limited business profile. In this respect, strong risk adjusted capitalisation was maintained, reflecting limited aggregate exposures compared to the capital base, while, liquidity remained strong evidencing potential to tolerate increased exposure to receivables, following the relaxation of cash and carry policies amidst the COVID-19 pandemic. These strengths are however partially restrained by volatile and intermediate earnings, which could moderate due to COVID-19 pandemic risks.

Earnings capacity is limited, evidencing high dependency on investment income, due to recurrent underwriting losses. In this respect, investment income averaged 150% of net profits over the past five years, offset by volatile underwriting margins averaging -7% over the corresponding period, which resulted in subdued net profitability. Weak underwriting profitability is a function of high operating expenses counteracting a favourable but volatile claims experience. These dynamics could persist due to potential premium growth suppression by the COVID-19 pandemic, as well as related investment yield compression, further moderating earnings potential.

Nevertheless, capitalisation was maintained at strong levels, with limited dividend payments enhancing internal capital generation. As such, the capital base grew on average by 10% over the review period, well above requirements to cater for aggregate risk exposures. Cognisance is taken of the relatively low capital base, which moderates the insurer’s capitalisation assessment. Going forward, the entity’s capitalisation assessment is expected to remain at similar levels, with relatively limited aggregate exposures balancing expected lower capital growth due to earnings strain from COVID-19 pandemic risks.

Liquidity is strong, driven by a conservative asset allocation, while working capital releases amounting to UGX2.7bn boosted cash balances in FY19. As a result, cash and stressed financial assets coverage of net technical liabilities and operational cash coverage remained above prudent levels, respectively at 2.0x and 15 months in FY19. However, given relaxation of cash and carry policies in response to COVID-19 challenges, receivables are expected to increase, which coupled with possible earnings strain is likely to result in liquidity moderating within the current range over the medium term.

The business profile remained limited, reflecting the mid-tier market position of the entity, consistently accounting for a 3% share of the short-term industry, with a stable relative market share of 0.7x. Furthermore, premium diversification was constrained by high dependence on broker sourced business and limited geographic diversification, offsetting a healthy product diversification, with four lines of business contributing material proportions of gross premiums. In GCR view, the business profile is likely to remain a major rating constrain over the medium term.

The rating also factored parental support from MUA Kenya, the majority shareholder, given strong assimilation to the group, brand alignment and integrated systems and operations.

Outlook statement

The Stable Outlook reflects expectations that capitalisation and liquidity will remain strong, offsetting earnings risk and limited business profile potential. Therefore, GCR expects earnings to moderate due to potential pressures on premium growth, reduced investment income and higher levels of receivables in the wake of the COVID-19 pandemic, albeit with a modest impact on capitalisation and liquidity strengths given accumulated buffers.

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 a strong range. Conversely, downward rating pressure may arise from a material deterioration in earnings and/or liquidity beyond expectations.

Analytical contacts

Related criteria and research

Ratings history

MUA Insurance (Uganda) Limited

Risk score summary

Glossary

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 rated entity and other reliable third parties to accord the credit rating included:

• Draft financial statements as at 31 December 2019;
• Four years of comparative audited financial statements to 31 December
• Full year budgeted financial statements for 2020;
• Unaudited management accounts to 30 April 2020;
• Reinsurance cover notes for 2020; and
• Other relevant documents.

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