Announcements

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

Johannesburg, 08 July 2016 — 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 2017.

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 market position (third largest in terms of industry gross premiums) in a highly competitive industry, 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, with potential enhancement stemming from increased involvement from Old Mutual Plc.

Risk adjusted capitalisation has been measured at strong levels, supported by the sizeable capital base catering for the quantum of market and insurance risks. In this respect, non-cash investments pertain to sizable exposures to listed shares and investment property (76% of FYE15 capital). Nonetheless, this level is considered manageable in view of the insurer’s current risk absorption capacity. The international solvency margin remained strong at 117% at FYE15 (FYE14: 147%). GCR expects the insurer’s risk adjusted capital adequacy to remain within a moderately strong range over the rating horizon, supported by sound internal capital generation.

Earnings capacity has measured at very strong levels historically, although cost pressure is budgeted to result in margin suppression over the rating horizon. The insurer’s five year aggregate underwriting margin equated to 7% over the review period, underpinned by competitive metrics in terms of both claims and expenses. However, the insurer’s underwriting margin deteriorated substantially in FY15 (-7%), in light of a 13 percentage point rise in the expense ratio to 30% (a function of impairments, group shared costs and rebranding), and a sustained high claims ratio of 69% (partly a function of changes in reserving methodology). Elevated expenses are expected to continue to suppress earnings capacity over the rating horizon, although an improved loss ratio (63%) is expected to facilitate an underwriting surplus in FY16.

Liquidity metrics improved over the review period, registering at a moderately strong level at FYE15. Cash coverage of net technical liabilities equated to a higher 0.7x at FYE15 (FYE14: 0.6x), and claims cash coverage equated to a higher 11 months at FYE15 (FYE14: 8 months). Going forward, liquidity metrics are expected to be maintained at the improved levels, underpinned by the asset allocation prescribed by the regulator.

Earnings diversification is aligned with industry norms, with the medical and motor portfolios dominating the net premium base, at a combined 86% of the risk base. Nonetheless, this is offset by the granularity of premiums and the low product risk associated with 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 FYE15 capital.

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)    
Outlook: Stable    
     
Last rating (June 2015)    
Claims paying ability: AA-(KE)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

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

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2015

UAP Kenya Rating Reports, 2007 – 2015

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 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.
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 Base The issued capital of a company, plus reserves and retained profits.
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.
Coverage The scope of the protection provided under a contract of insurance.
Deductible The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.
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.
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.
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.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
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.
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.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.

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 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 2015
  • Unaudited year to date results to 30 April 2016
  • Budgeted financial results to December 2016
  • Reinsurance cover notes 2016
  • Actuarial Valuation 2015
  • Financial Condition Report 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.

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

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