Announcements

GCR affirms UAP Insurance Company Limited’s rating of AA-(KE); Outlook Stable

Johannesburg, 7 Aug 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to UAP Insurance Company Limited of AA-(KE); with the outlook accorded as Stable. The rating is valid until June 2016.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to UAP Insurance Company Limited (“UAP Kenya”) based on the following key criteria:

UAP Kenya reflects strong competitive positioning, supported by strong brand recognition and new product offerings. The insurer has developed a well-established franchise and solid business position (third largest) in a highly competitive market, cemented by its demonstrated ability to enhance its premium base at a consistently robust pace. UAP Kenya’s position within a large and entrenched regional group is viewed to further augment market presence.

Risk adjusted capitalisation has been measured at strong levels, supported by the sizeable capital base, which offsets the high exposure to market risk. GCR expects the insurer’s capital adequacy to remain within a moderately strong range over the rating horizon, supported by sound internal capital generation. Furthermore, net deductibles per risk and event, as per the reinsurance programme, are set to a conservative level relative to capital, while reinsurance arrangements are placed with a diverse panel of reinsurers reflecting a strong level of aggregate rating strength.

The insurer’s liquidity metrics have improved over the past two years to register at intermediate levels, albeit measuring at weaker levels compared to peers, largely as a result of the aggressive investment strategy. In this regard, asset quality is intermediate, given significant market and credit risk exposures to listed equities (representing an elevated 54% of capital), real estate (41% of capital), as well as sizeable intercompany loans (19% of capital). These are, however, considered manageable in view of the insurer’s current risk absorption capacity.

UAP Kenya has recorded sound underwriting profitability over the review period, albeit softening over the last two years. This has largely been a function of unfavourable claims experiences, offsetting improvements in cost efficiencies. In this regard, GCR expects earnings capacity to remain within a moderately sound level, supported by a budgeted turn around in claims experience.

The insurer reflects a relatively modest earnings profile, given the limited net premium diversification across lines of business, albeit supplemented by the high granularity of the policy count. In this regard, UAP Kenya’s underwriting risk base is heavily slanted towards medical and motor risks, accounting for a combined 83% of net premiums.

Positive rating action could emanate from the maintenance of market share at strong levels while sustaining strong risk-adjusted capitalisation and recurring core profitability, whilst liquidity metrics improve notably. A deterioration in capitalisation due to profit or heightened investment volatility and/or a reduction in key liquidity metrics from current levels may impact adversely on the rating status which could result in downward rating action.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (June 2007)    
Claims paying ability: AA(KE)    
Outlook: Stable    
     
Last rating (June 2014)    
Claims paying ability: AA-(KE)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Marc Chadwick   Sheri Few
Sector Head: Insurance Ratings   Senior Credit Analyst
(011) 784-1771   (011) 784-1771
chadwick@globalratings.net   few@globalratings.net
     
Secondary Analyst    
Rodwell Chevure

Junior Analyst

(011) 784-1771

   
rodwellc@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2015

UAP Kenya Rating Reports, 2007 – 2014

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. 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
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.
Capital Base The issued capital of a company, plus reserves and retained profits.
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.
Credit Rating Agency An entity that provides credit rating services.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
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.
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.
Interest Money paid for the use of money.
Liquidity The speed at which assets can be converted to cash.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Loss The happening of the event for which insurance pays.
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 The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
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
Rating Outlook A rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
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.
Securities Various instruments used in the capital market to raise funds.
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.

For a detailed glossary of terms please click here

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.

UAP Insurance 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/s has been disclosed to UAP Insurance Company Limited with no contestation of the rating.

The information received from UAP Insurance Company Limited and other reliable third parties to accord the credit rating(s) included:

  • Audited financial results to 31 December 2014
  • Unaudited year to date results to 30 June 2015
  • Budgeted financial results to December 2015
  • Reinsurance cover notes 2015
  • Other relevant company specific information

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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