Johannesburg, 01 October 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Phoenix of Uganda Assurance Company Limited of A(UG), with the outlook accorded as Stable. The rating is valid until July 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Phoenix of Uganda Assurance Company Limited (“Phoenix Uganda”) based on the following key factors:
Phoenix Uganda’s rating derives support from strong risk adjusted capitalisation. This has largely been a function of well contained insurance and market risk exposures, albeit somewhat moderated by credit risk. The international solvency margin registered at 106% at FY17 (FY16: 122%) and reduced to 80% (FY16: 99%) when adjusted for proposed dividends and receivables aged above 180 days. GCR expects risk adjusted capitalisation to remain at strong levels over the rating horizon, while the factor’s medium term assessment is expected to follow developments in internal capital generation (viz. a vis. premium growth), associated credit risk and dividend distributions. Furthermore, maximum exposure per risk and event was maintained at conservative levels relative to capital, while reinsurance counterparties evidenced a strong level of aggregate credit strength.
Liquidity is viewed to be moderately strong, with very strong metrics offset by single banking counterparty concentration. Key liquidity measures remained elevated, largely supported by sound investment income and a conservative asset allocation. Cash coverage of net technical provisions equated to 2.1x at FY17 (FY16: 2.0x), while the claims cash cover ratio registered at a high 45 months (FY16: 71 months). GCR expects liquidity strength to remain at similar levels over the outlook horizon.
Phoenix Uganda’s earnings capacity reduced from a moderately strong range to a moderately weak level, with solid investment income offset by underwriting margin compression and volatility. Underwriting margins exhibited a vulnerable trend over the past three years (FY17: -11%; FY16: 0.3%; BGT18: 0.3%), caused by an elevation in the operating expense ratio to 60% in FY15 (FY14: 43%; FY17: 61%), resulting in a sustained loss of scale efficiencies. This notwithstanding, the insurer implemented corrective action to reduce the loss ratio and increase revenue scale, with a positive underwriting margin likely to be realised in FY18 (1H F18: 8.8%; 1H F17: -7.6%). Further earnings support is expected from consistent and sound investment income, which averaged 12% of NEP over the review period, anchoring ROE (review period average: 12%; FY17: 4%). In this respect, the insurer’s ability to sustainably improve underwriting performance over the medium term represents a rating consideration.
The insurer’s business profile is viewed to be intermediate, underpinned by a relatively limited competitive positioning, partially offset by fairly well diversified earnings. In this regard, the insurer’s share of total short term industry gross premiums remained relatively limited at 3.3% in FY17. Nonetheless, the business mix is viewed to be fairly well spread, with three lines of business representing a combined 85% of overall gross premiums. GCR expects the business profile to remain at a similar level over the outlook horizon.
Positive rating action could be realised over the medium term on the back of a sustained improvement in underwriting results, while maintaining strong risk adjusted capitalisation and liquidity. The rating is sensitive to earnings compression, coupled with volatility, and very high single banking counterparty exposure, which if sustained could lead to negative rating action.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (April 2012)|
|Claims paying ability: A(UG)|
|Last rating (November 2017)|
|Claims paying ability: A(UG)|
|Senior Credit Analyst|
|(011) 784 – 1771|
|Sector Head: Insurance Ratings|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
Phoenix Uganda rating reports, 2012-2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Phoenix of Uganda Assurance Company Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to Phoenix of Uganda Assurance Company Limited.
The information received from Phoenix of Uganda Assurance Company Limited and other reliable third parties to accord the credit rating included:
- The 2017 audited annual financial statements Four years of comparative audited numbers
- Unaudited interim results to 30 June 2018
- Budgeted financial statements for 2018
- 2018 reinsurance cover notes
- Other related documents.
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.
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|International Scale Rating (“ISR”)||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Statutory||Required by or having to do with law or statute.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a more detailed glossary of terms, please click here
GCR affirms Phoenix of Uganda Assurance Company Limited’s rating of A(UG); Outlook Stable.