Johannesburg, 17 Nov 2015 — Global Credit Ratings has today affirmed the national scale financial strength rating assigned to UAP Life Assurance Limited of BBB+(KE), with the outlook accorded as Negative. The rating is valid until September 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to UAP Life Assurance Limited (“UAP Life”) based on the following key criteria:
Capital generation has been volatile, stemming from the unstable profit trend. The net loss of KES190m in FY14 saw the statutory capital calculation decrease below the regulatory minimum. Further large bottom line losses incurred for the ten months to October FY15 (KES453m) have been registered, eroding almost all additional capital injected into the business during the course of the year (cumulatively amounting to KES500m). Accordingly, statutory solvency compliance is reliant on receipt of the projected capital injection of KES500m by the group in FY16. The Negative Outlook reflects GCR’s view of this sustained weakness in capital adequacy, which could persist over the outlook horizon should losses continue to emanate (from either the investment or operating accounts). Positively, comfort is derived from the historical track record of injections received from the group, while GCR’s view of the insurer’s capital management capacity is bolstered by the company’s use of an economic capital model (developed in FY14).
The volatile earnings trend has been a function of unrealised movements and, more recently, high policyholder reserve transfers. The operating margin has been unstable, registering at -9% in FY14 (FY13: 22%, FY12: 28%, FY11: -289%, FY10: -3%). In response, management has indicated a less aggressive drive towards reserve intensive products, as well as a review of the investment allocation strategy. GCR expects volatility in earnings generation to continue over the short term, given the time required to bed down corrective actions (as evidenced by the weak YTD margin of -37%). Management is, nevertheless, targeting a medium term operating margin range of between 5% and 10%.
UAP Life’s liquidity has measured at strong levels over the review period. Investment coverage of total policyholder liabilities was stable at 1.1x in FY14, while liquid holdings correspond to 52% of the latter. Going forward, liquidity strength is expected to be maintained. Furthermore, asset liability matching registered at a moderate level in FY14, which is expected to be maintained.
UAP Life’s competitive position strengthened over the review period, registering at an intermediate position in FY14. This is underpinned by the insurer’s strong brand and strategic execution capabilities, which have driven top line growth over the review period (GWP CAGR of 49%). Over the medium term, the involvement of Old Mutual Plc at a shareholding level should further cement the insurer’s competitive position, catering for potential revenue fluctuations over the short term.
Earnings diversification has measured at a strong level, supported by the full spectrum of individual life and group life products offered by the insurer. However, earnings diversification is limited by the elevated product risk, stemming from a weighting towards annuity business (39% of GWP). GCR expects the insurer’s less aggressive pursuit of annuity business to contribute to lower product risk going forward.
Overall, the quality of the insurer’s reinsurance counterparties is considered sound, with all of the above listed entities reflecting national scale claims paying ability ratings in the “A” band or above. Net deductibles are set at a conservative level, with the maximum retention per risk at KES6m, corresponding to 1% of FYE14 capital.
The negative outlook reflects potential for the rating to be downgraded over the short term, should the continuation of fair value losses, and/or other sources of operational losses, place continued pressure on capitalisation and capital generation capacity. Further downward pressure may emanate from a decline in liquidity metrics. The rating outlook may be revised to stable, or the rating may strengthen, should key capitalisation, and earnings capacity metrics evidence improvements that are likely to be sustained over the medium term.
|NATIONAL SCALE RATINGS HISTORY|
|Initial / last rating (December 2014)|
|Financial strength: BBB+(KE)|
|Primary Analyst||Committee Chairperson|
|Marc Chadwick||Sheri Few|
|Sector Head: Insurance Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Junior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Long Term Insurers, updated July 2015
UAP Life rating reports, 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
|Actuarial||Having to do with insurance mathematics.|
|Assets||The items on the balance sheet of the insurer which show the book value of property owned.|
|Assurance||Terminology used to describe life insurance.|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Bond||A certificate issued by a government or corporation as evidence of a debt.|
|Capacity||The largest amount of insurance or reinsurance available from a company.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer to agents and brokers.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Insurance||A formal social device for reducing risk by transferring the risks of several individual entities to an insurer.|
|Insured||A person or organisation covered by an insurance policy, including the “named insured” and any other parties for whom protection is provided under the policy terms.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss||The happening of the event for which insurance pays.|
|Long term (“LT”)||Not current; ordinarily more than one year.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|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. Also, the total securities owned by an insurer.|
|Provision||A part (clause, sentence, paragraph, etc.) of an insurance contract that describes or explains a feature, benefit, condition, requirement, etc. of the insurance protection afforded by the contract.|
|Rate||The pricing factor upon which the insurance buyer’s premium is based.|
|Rating||The statistical process by which insurers determine risks and pricing for the basic classes of insurance.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|Securities||Evidences of a debt or of ownership, such as stocks, bonds, and checks.|
|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.|
|Surplus||The excess of assets over liabilities.|
|Valuation||Estimation of the value of an item, usually by appraisal.|
For a detailed glossary 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 Life Assurance 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 Life Assurance Limited with no contestation of the rating.
The information received from UAP Life Assurance Limited and other reliable third parties to accord the credit rating included;
- Audited financial results of Company as at 31 December 2014
- Four years prior audited financial statements
- Unaudited interim results as per 30 September 2015
- Budgeted 2015
- Actuarial report 2014
- Statutory returns 2014
- Financial Condition Report 2014
- The current year reinsurance/retrocession cover notes
- Other non-public statistical 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 Life Assurance Limited’s rating of BBB+(KE); Outlook Negative.