Johannesburg, 19 June 2018 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to UAP Old Mutual Insurance Uganda Limited of A+(UG), 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 Old Mutual Insurance Uganda Limited (“UAP Uganda”) based on the following key criteria:
UAP Uganda’s standalone credit profile is viewed to benefit from implied shareholder support, following the rebranding exercise undertaken in FY16. UAP Uganda is a majority (53%) owned subsidiary of UAP Holdings Limited, which is in turn majority-owned by South African based Old Mutual Plc. (“the group”). In this regard, technical support from shareholders during the review year served to curtail a three year deterioration in the financial profile, thereby supporting a level of stabilisation in the insurer’s credit profile.
The insurer’s earnings capacity is viewed to have significantly improved in FY17, potentially ending persistent historical underwriting losses in FY18. This is largely a function of key earnings drivers evidencing stability within a viable range. Cost reduction initiatives, combined with value driven scale enhancement, generated a year on year underwriting profit movement of UGX3.5bn in FY17. Resultantly, the insurer’s underwriting loss narrowed to UGX297m (FY16: UGX3.7bn loss), with a further improvement to a profit of UGX1.5bn budgeted for FY18. GCR sees a high likelihood of the ongoing harnessing of cost drivers and increased emphasis on profitable growth to secure sustainable underwriting profitability over the outlook period.
Concurrently, risk adjusted capitalisation is viewed to be intermediate and could strengthen over the rating horizon should adequate improvements in return on revenue be registered. This is evidenced by a budgeted uptick in the international solvency margin to 72% in FY18 (FY17: 68%) as revenue growth slows relative to returns. All else constant, the observance of a cautious underwriting strategy, complemented by credit discipline (primed by regulatory directives), has potential to feed into a material strengthening in risk adjusted capitalisation over the medium term. Furthermore, solvency protection from reinsurance is viewed to be sound, with 2018 deductibles limited to levels which are viewed to be conservative relative to capital, whilst the reinsurance panel reflected moderately strong aggregate counterparty strength.
Liquidity measured at very strong level, supported by strong cash generation from operations. The majority of cash flows were invested in short term deposits and government securities at FY17, raising cash coverage of technical liabilities (inclusive of interest securities) to 1.4x (FY16: 1.2x). Given potential for subsiding pressures on operating cash flows, liquidity could be maintained within a similar range over the rating horizon.
UAP Uganda reflects a very strong competitive position, representing a key rating strength. In this respect, the insurer is the second largest player in the short term insurance industry, with a market share of 21% in FY17. This has been underpinned by strong recognition of the UAP brand in East Africa and reinforced by the group’s international franchise. Further supported by a well-established distribution network, the insurer exhibits capacity to execute prudent underwriting strategies, while retaining a robust market position.
Earnings diversification is aligned with industry norms, with three core lines jointly dominating at 65% and 76% of gross and net premiums. However, underwriting prudence at net level skews weights to more granular risks, thus reducing aggregate product risk to low levels.
Upward rating movement could follow a sustained improvement in earnings capacity, coupled with a strengthening in risk adjusted capitalisation. On the other hand, increased investment risk and/or lower liquidity strength could result in negative rating pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2007)|
|Claims paying ability: A+(UG)|
|Last rating (July 2017)|
|Claims paying ability: A+(UG)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Yvonne Mujuru|
|Senior 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 Uganda Limited rating reports, 2007-2014
UAP Old Mutual Uganda Limited rating report, 2015
UAP Old Mutual Insurance Uganda Limited rating reports, 2016-2017
RATING LIMITATIONS AND DISCLAIM4RS
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/RATING-SCALES-DEFINITIONS. 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 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 Old Mutual Insurance Uganda 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 Old Mutual Insurance Uganda Limited with no contestation of the rating.
The information received from UAP Old Mutual Insurance Uganda Limited and other reliable third parties to accord the credit rating included:
- The 2017 audited annual financial statements Four years of comparative audited numbers
- Unaudited interim results to 31 March 2018
- Budgeted financial statements for 2018
- 2018 reinsurance cover notes
- Other related documents.
The rating above was solicited by, or on behalf of, the rated client, 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
|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.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance 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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
For a more detailed glossary of term, please click here
GCR affirms UAP Old Mutual Insurance Uganda Limited’s rating of A+(UG); Outlook Stable