Johannesburg, 13 July 2018 — 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 2019.
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’s risk adjusted capitalisation measured at strong levels, supported by a sizeable capital base catering for the quantum of market and insurance risks. Non-cash investments pertain to exposures to listed shares and investment property (together accounting for 65% of FY17 capital). Nonetheless, such a level of exposure is considered manageable in view of the insurer’s current risk absorption capacity. The adjusted international solvency margin registered at a higher 92% at FY17 (FY16: 83%), largely as a function of a decline in the net risk base, coupled with modest growth in the capital base. GCR expects the insurer’s capital adequacy to remain within a strong range over the rating horizon, underpinned by a large capital base.
The insurer reflects strong competitive positioning, underpinned by strong brand recognition. The insurer has developed a well-established franchise and solid market position in a highly competitive industry, cemented by its demonstrated ability to enhance its premium base at a consistently robust pace. Cognisance is taken, however, of material premium contraction evidenced in FY17, on the back of a reduction in medical business. Nonetheless, the insurer remained the third largest player, with a share of 7.9% of total short term industry premiums in FY17 (FY16: 9%). GCR expects UAP Kenya’s competitive position to remain solid, supported by its position within a large and entrenched regional group, with potential enhancement stemming from increased involvement from Old Mutual Plc.
Liquidity is assessed at a moderately strong level. In this regard, cash (inclusive of interest and long-term government securities) coverage of net technical liabilities remained moderately stable at 0.9x at FY17 (FY16: 0.8x), while cash (including long term government securities) covered average monthly claims by 12 months (FY16: 10 months). Liquidity is expected to be maintained at similar levels going forward, underpinned by somewhat conservative asset allocation.
Earnings capacity is viewed to be intermediate, having moderated from strong levels recorded during the first two years of the review period. This was largely due to moderately weak underwriting profitability, partially offsetting sound investment returns. In this regard, the recent three year cycle underwriting margin equated to -2%, compared with a two year average of 10% recorded at the start of the review period, while the investment yield averaged 8% over the review period. Cognisance is taken, however, of the improved underwriting performance registered in FY17 (with an underwriting margin of 4%), following a reduction in the net incurred loss ratio to 62% (FY16: 69%). In GCR’s view, earnings capacity is likely to remain within an intermediate range, albeit potentially moderating further on the back of an increase in the claims ratio should the insurer continue to target strong growth in less profitable portfolios.
Earnings diversification is aligned with industry norms, with the medical and motor portfolios dominating the net premium base, constituting a combined 87% in FY17. Nonetheless, this is offset by the granularity of premiums within the classes. UAP Kenya’s reinsurance counterparties reflect a moderately strong level of aggregate strength, whilst deductibles are limited to levels which are viewed to be conservative relative to FY17 capital.
UAP Kenya’s standalone credit profile is viewed to benefit from implied shareholder support, following the rebranding exercise undertaken in FY16. In this respect, UAP Kenya is a wholly owned subsidiary of UAP Old Mutual, which in turn is majority-owned by South African based Old Mutual Plc. (“the group”). The rating upliftment therefrom has served to offset the negative impact of a downwards moderation in earnings capacity on the insurer’s financial profile.
The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. In this regard, positive rating action may follow an assessment of country and industry risk factors. The rating exhibits negative sensitivity to weakening profitability, a reduction in liquidity, or a lowering in risk based capital adequacy.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2007)|
|Claims paying ability: AA(KE)|
|Last rating (June 2017)|
|Claims paying ability: AA-(KE)|
|Primary Analyst||Committee Chairperson|
|Tichaona Nyakudya||Yvonne Mujuru|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
UAP Insurance Company Limited Rating Reports, 2007 – 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. 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 process 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 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 included:
- Audited financial results to 31 December 2017
- Unaudited year to date results to 31 March 2018
- Budgeted financial results to December 2018
- Reinsurance cover notes 2018
- Financial Condition Report 2017
- Other relevant company specific information
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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.|
|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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the 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.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|International Scale Rating LC||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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|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.|
|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.|
|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|
|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.|
|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.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.|
|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.