Nairobi, 30 November 2020 – GCR Ratings (“GCR”) has affirmed UAP Old Mutual Insurance Uganda Limited’s (“UAP Old Mutual Uganda”) national scale financial strength rating of A+(UG), with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|UAP Old Mutual Insurance Uganda Limited||Financial strength||National||A+(UG)||Stable Outlook|
UAP Old Mutual Uganda’s national scale financial strength rating reflects a strong financial profile underpinned by healthy liquidity and moderate earnings and risk adjusted capitalisation. Meanwhile, a strong competitive position in the local market supports the business profile within a moderately strong range.
Liquidity represented a key rating strength, with consistent improvements driven by the recent adoption of a more conservative asset allocation, through investments in shorter term securities. In this respect, cash and stressed financial assets coverage of net technical obligations strengthened to 1.9x at FY19, (FY18: 1.8x; FY17: 1.7x) while coverage of operational cost requirements also improved to 14 months in FY19 (FY18: 12 months; FY17: 10 months). Liquidity metrics are expected to measure at similar levels going forward, given management’s plans to maintain a similar asset allocation, skewed toward low risk investments.
Risk adjusted capitalisation remained within a moderately strong range, driven by healthy internal capital generation over the review period, with FY19 capitalisation further supported by the absence of a dividend payment as well as lower operational and market risk charges. As such, the GCR capital adequacy ratio (“CAR”) equated to 1.6x at FY19 (FY18: 1.5x). However, the capitalisation assessment considered elevated capital exposure to the insurer’s property investments and those of its associate company, accounting for 38% and 23% of capital, respectively. Going forward, risk adjusted capitalisation is expected to remain at similar levels, with the potential for better earnings management to continue to be offset by property risk exposures.
Earnings remain moderately strong, with the improvement in underwriting profitability over the past two years offset by reduced net profitability. Continued improvement in operational efficiencies supported a strengthening in underwriting profitability, with the underwriting margin equating to 12% in FY19 (FY18: 7%) compared to the underwriting losses posted between FY15 and FY17. However, fair value losses on property related investments caused the FY19 net profit to reduce to UGX1.7bn (FY18 UGX9.7bn), which moderated return on revenue to 2% (FY18: 12%). GCR expects the improved operational efficiencies to be sustained in the medium term, albeit with potential for the property risks to continue suppressing developing earnings strengths.
The rating is positively impacted by the insurer’s business profile, underpinned by its strong market position in Uganda, where the insurer commands a market share and relative market share of 17.9% and 3.8x as at FY19. However, the premium base is relatively concentrated with two lines of business contributing materially to the gross premium base and a high net premium concentration to the medical book. In addition, the insurer’s revenue source is geographically limited, given that all premiums are derived from the primary market. Going forward, competitive position is expected to be maintained within the same range, supported by entrenched market relationships with intermediaries and policyholders.
UAP Old Mutual Uganda evidences a history of financial and technical support from UAP Holdings Plc (“the group”), together with strategic and operational integration and brand alignment. However, our assessment of group support reduced due to a reduction in the group’s credit profile.
The Stable Outlook reflects expectations that the credit profile of UAP Old Mutual will be maintained, with a GCR CAR registering between 1.5x – 1.7x in the near term. The liquidity coverage ratio is likely to continue measuring between 1.8x- 2.0x, while asset allocation remains weighted towards short-term assets. Underwriting profitability is expected to be maintained at strengthened levels, although earnings remain susceptible to potential volatility caused by fair value movements. No material changes to the business profile are expected over the outlook horizon.
Positive rating action may follow a sustained improvement in risk adjusted capitalisation and liquidity, while the business profile is maintained at similar levels. Furthermore, a strengthening in the group’s credit profile could result in a positive rating movement. Conversely, negative rating action may ensue if earnings reduce below expected levels and this adversely impacts other credit protection metrics.
|Primary analyst||David Mburu||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 20 367 3618|
|Secondary analyst||Marlaine Fleur Ngassa||Analyst: Insurance Ratings|
|Johannesburg, ZA||MarlaineN@GCRratings.com||+27 11 784 1771|
|Committee chair||Susan Hawthorne||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||SusanH@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, November 2020
GCR Insurance Sector Risk Scores, July 2020
UAP Old Mutual Insurance Uganda Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A+(UG)||Stable||July 2007|
|Financial strength||Last||National||A+(UG)||Stable||September 2019|
Risk Score Summary
|Rating Components and Factors||Risk score|
|Country risk score||3.25|
|Sector risk score||3.75|
|Management and governance||0.00|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Primary Market||The part of the capital markets that deals with the issuance of new securities.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
SALIENT POINTS 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 is based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating is an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating. The rated entity participated in the rating process via virtual 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 the entities and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020.
- Unaudited interim results to 31 October 2020 and
- Other relevant documents.