Johannesburg, 30th September 2019 – GCR Ratings (“GCR”) has affirmed UAP Old Mutual Insurance Uganda Limited’s (“UAP Old Mutual Uganda”) national scale financial strength (formerly claims paying ability) rating at A+(UG), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|UAP Old Mutual Insurance Uganda Limited||Financial strength||National||A+(UG)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for UAP Old Mutual Uganda was placed ‘Under Criteria Observation’. GCR finalised the review for UAP Old Mutual Uganda under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for UAP Old Mutual Uganda has been affirmed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The rating affirmation reflects UAP Old Mutual Uganda’s moderately strong and stable business profile, characterised by a strong competitive position, partially offset by product concentration. While positive structural changes are observable on the firm’s liquidity and earnings capacity, a neutral financial profile is viewed to persist over the rating horizon.
The insurer’s sound competitive position is underpinned by a high and stable market share of 20% and relative market share of 4x in the domestic short term insurance market in FY18. Competitive positioning has been supported by established market relations and strong brand resonance with the group. The dual brand has served to retain the heritage of the UAP brand in East Africa and blend it with the international image of Old Mutual, hence providing scope for strong business retention and transition into new markets. Going forward, there are plans for full brand transition to Old Mutual as the brand’s equity matures within the market. However, the product portfolio displays concentration to two significant lines of business, with an elevated skew towards medical risks. This has impacted on the overall quality of risks over the review period, with a moderation in both concentration and market share expected on the back of stringent underwriting and risk selection in problem portfolios. This notwithstanding, GCR expects the insurer’s high market share to afford a level of business profile defensiveness.
UAP Old Mutual Uganda managed to turn around earnings capacity to an intermediate level in FY18, from moderately weak levels previously. The improvement was largely driven by a reduction in operating expenses through the rationalisation of staff and automation initiatives, cutting the operating expense ratio to 29% (prior four year average: 40%). Furthermore, the net commission ratio lowered to 9% (FY17: 11%; BGT19: 10%), potentially cementing underwriting performance at positive levels, given profit headroom enhancement expected from increased direct selling in FY19. Note is also taken of potential for further earnings support from remediation efforts on the medical book, leaving loss ratio control as the next frontier for earnings improvement over the medium term.
Risk adjusted capitalisation is likely to be maintained at an intermediate level over the rating horizon, supported by well contained underwriting and credit risks. However, relatively low quality of capital constrains the factor assessment. The insurer’s ability to sustain an improvement in internal capital generation could provide some reprieve over the outlook horizon. Liquidity measured within a moderate range, with operational cash coverage and cash coverage of net technical liabilities equating to 12 months (FY17: 10 months) and 1.8x (FY17: 1.7x) respectively. An improvement in liquidity metrics, backed by prospects of increased operational cash flows and systematic support from cash and carry regulations, represents a key rating consideration over the medium term.
The rating derives support from UAP Holdings Limited, a majority shareholder, given evidence of strategic and operational importance.
The Stable Outlook reflects expectations of short term consolidation of earnings and liquidity metrics within similar ranges over the rating horizon.
The ratings could be upgraded on the back of sustained improvements in earnings capacity and/or liquidity. Conversely, downward rating pressure could arise from increased exposure to risky assets that dilutes risk adjusted capitalisation.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Insurance Sector Risk Scores, July 2019|
|GCR revises UAP Kenya’s national scale rating to A+(KE); Stable Outlook, September 2019|
UAP Old Mutual Insurance Uganda Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(UG)||Stable||July 2007|
Risk Score Summary
|Risk score||UAP Old Mutual Uganda|
|Country risk score||3.50|
|Sector risk score||3.75|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and un-designed, which occurs suddenly and at a definite place.|
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|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.|
|Captive Insurance Company||A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|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.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|Facultative||Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set 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.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|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.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinstatement||The resumption of coverage under a policy, which has lapsed.|
|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.|
Salient Points of Accorded Rating
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to UAP Old Mutual Uganda Insurance Limited. 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.
UAP Old Mutual Insurance Uganda Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from UAP Old Mutual Insurance Uganda Limited and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2019;
- Reinsurance cover notes for 2019;
- Other relevant documents.