Johannesburg, 13 September 2017 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to UAP Insurance South Sudan Limited to BBB-(SS), with the outlook accorded as Negative. The rating is valid until August 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to UAP Insurance South Sudan Limited (“UAP South Sudan”) based on the following key criteria:
The rating downgrade reflects UAP South Sudan’s very high capital exposure to its subsidiary, which has increased substantially relative to prior year levels. This has been exacerbated by lower than anticipated performance on the underlying earning asset, which is negatively impacted by the uncertain economic and political environment. There is, therefore, a higher risk that the payback period of sizeable loans to the subsidiary, which are subordinated to external loans, could be prolonged beyond the short term nature of predominant liabilities. However, note is taken of the partial offsetting effect of the implied support framework offered by UAP Old Mutual Limited, which GCR believes has potential to absorb medium term shocks and limit the full realisation of downside risks.
Despite high nominal solvency metrics, capitalisation is negatively impacted by elevated exposure to high risk assets, reducing to a weak level. The international solvency margin measured at a high 131% at FY16 (FY15: 102%), reflecting relatively low underwriting risk. However, the bulk of capital covering risks is exposed to related party loans and high risk financial assets, which measured at 83% (FY15: 62%; FY14: 35%) and 60% of FY16 capital respectively, with exposure to investment property being high in both respects. GCR views this to present significant balance sheet risk. Furthermore, GCR notes with concern the rapid deterioration in the insurer’s solvency level when more severe scenarios are applied to the subsidiary and related party loan, underpinning the negative outlook.
Consolidated liquidity metrics measured at a strong level, albeit reliant on external funding. In this regard, consolidated cash coverage of technical liabilities equated to 1.1x at FY16 (FY15: 0.6x) supported by long term business cash flows, while that on the short term business measured at 0.9x (FY15: 0.4x). However, liquidity metrics display sensitivity to the capital structure, with coverage of technical liabilities measuring at low ungeared levels of 0.4x and 0.2x for consolidated and short term business respectively. As such, liquidity is expected to measure within a strong range over the rating horizon, albeit with continued reliance on external funding. GCR further notes the possible vulnerability of liquidity over the medium term, due to the amortisation of long term loans.
Balance sheet risks aside, earnings capacity measured within a sound range, with very strong underwriting performance offset by sizeable foreign exchange losses. The underwriting margin measured at an unusually high 40% in FY16 (prior four year average: 10%), benefitting from reserve releases and suppressed underwriting expenses (due to a sizeable portion of costs paid in the depreciating local currency). However, the net exposure of operations to local currency resulted in counterbalancing sizeable foreign exchange losses (FY16: USD5m; FY15: USD2m gain). Consequently, the return on revenue reduced to 21% in FY16 (FY15: 43%). Going forward, earnings are expected to measure within a sound cross cycle range, although remaining vulnerable to year on year volatility stemming from economic and political risks.
Furthermore, UAP South Sudan’s business profile is considered to be strong, supported by the insurer’s market leadership position and a healthy spread in the business mix. The insurer is the oldest player in South Sudan, with a well franchised brand in the short term industry, accounting for an estimated market share of above 30%. This has facilitated a somewhat diversified revenue stream, with concentration in the short term business mix (motor and medical lines contributing a combined 90% of gross premiums) being moderated by modest but scalable long term business revenues (8% of aggregate premiums in FY16). Going forward, there is scope for the insurer to enhance market positioning through carving out niche markets in specialised risks (supported by Old Mutual Specialty Insurance) ahead of competition, given the envisaged strengthening in underwriting and operational systems. However, the business profile is exposed to country risk factors, in view of the unstable macroeconomic and political environment in South Sudan. In addition, the insurance industry displays very weak regulatory fundamentals, which exacerbate operational challenges.
Reinsurance counterparties display sound aggregate strength, whilst deductible limits are viewed to be set at conservative levels of less than 1% of FY16 capital.
Negative rating action could follow a lower than expected performance by UAP Properties (Sudan) with the severity of the downward rating movement depending on the extent of the solvency impact of subsidiary and associated related party loans. Conversely, the stabilisation of UAP South Sudan’s credit profile may result in the rating being placed on a stable outlook. An upgrade is possible over the medium term, should the insurer demonstrate a sustained improvement in the credit profile.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2009)|
|Claims paying ability: A-(SS)|
|Last rating (September 2016)|
|Claims paying ability: BBB+(SS)|
|Primary Analyst||Committee Chairperson|
|Godfrey Chingono||Susan Hawthorne|
|Credit Analyst||Senior Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Criteria for Rating Long Term Insurance Companies, updated July 2017
UAP Insurance South Sudan Limited’s rating reports, 2009-2016
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/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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
UAP Insurance South Sudan 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 South Sudan Limited with no contestation of the rating.
The information received from UAP Insurance South Sudan Limited and other reliable third parties to accord the credit rating included:
- The 2016 audited annual financial statements 4 years of comparative audited numbers
- Unaudited interim results to 31 July 2017
- Budgeted financial statements for 2017
- 2017 reinsurance summary
- 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.
|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 terms, please click here
GCR downgrades UAP Insurance South Sudan Limited’s rating to BBB-(SS); Outlook Negative.