Nairobi, 5th October 2021 – GCR Ratings (“GCR”) downgrades UAP Insurance Company Limited (“UAP Kenya”) national scale financial strength rating to A-(KE), from A+(KE), Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|UAP Insurance Company Limited||Financial strength||National||A-(KE)||Stable Outlook|
UAP Kenya’s rating reflects the strengths and weaknesses of UAP Holdings PLC (“the group”), being the core operating entity of the group. The rating downgrade follows the group’s sustained low group risk adjusted capitalisation metrics, due to significant fair value losses over the past three years (largely from investment properties and listed equities); and the non-conversion of the shareholder loan to equity as per expectations, thus reducing patient funding for sizeable property investments. The Stable Outlook reflects the improvement in the average occupancy level of investment property and associated rental income, which to a great extent match finance cost. Furthermore, contracted loan facilities are viewed to afford the group some flexibility in unlocking capital from the investment properties over the next two years. The business profile remains very strong, bolstered by the short-term businesses’ top market position in Kenya, Uganda, Rwanda and South Sudan and a well-diversified product mix, augmented by a growing life portfolio.
The group’s capital reduced consistently over the past three years to KES13.0bn at FY20, from KES18.3bn at FY17, mainly eroded by fair value losses in investment property and listed equities. In this respect, risk adjusted capitalisation reduced from moderately strong to a moderately weak range and is fairly cemented at current levels. Although note is taken of an improvement in group net earnings in 1H F21, on the back of fair value gains on listed equities, we do not see a steep enough trend that can significantly recoup cumulative losses recorded over the past three years. In this respect, the group’s GCR capital adequacy ratio (“CAR”) is likely to be sustained around 1.2x, from above 1.5x pre-FY18. Furthermore, exposure to investment property is likely to remain high relative to the capital base (FY20: 126.7%; FY19: 116.2%), given execution risks to the planned creation of the property special purpose vehicle “property SPV” to unlock capital. On a positive note, UAP Kenya’s stand-alone statutory solvency risk is deemed to be low, improving its statutory CAR to 244% (FY19: 215%). The review year improvement was on the back of reduced aged receivables and market risk, coupled with positive earnings, outbalancing high dividend extraction from the group. The core entity’s risk adjusted capitalisation is expected to be sustained at similar levels in the near-term, reflecting our projections of improved earnings and somewhat stable risk exposures. This is viewed to offset group risks somewhat, further supporting the stable outlook.
The group’s liquidity management is pressurised on account of high risky assets exposure and unsustainable outstanding loan facilities (mostly short to medium term), giving rise to sizeable finance costs that partially offset realised investment income. This is against a rising quantum of net technical liabilities. In this respect, the liquidity ratio measured below 1.3x, while the operating cash coverage remained around 13 months, with the high-risk investment portfolio offering limited asset liability matching. Cognisance is taken of the reduction of currency related risks following loan refinancing on significant debt denominated in foreign currency; however, the group’s ability to refinance medium term facilities upon maturity remains critical to the liquidity assessment. Furthermore, the repayment of the shareholder loan of KES5.7bn in the near term is dependent on the successful execution of the property SPV project that is currently underway. Liquidity management is, therefore, a key rating input over the short-to-medium term, given the rating’s sensitivity to the insurer’s ability to manage exposures to investment property and financial leverage.
UAP Holdings’ earnings are expected to recover to a positive range in FY21, with a gradual uptrend likely to be sustained over the near term. Both the group and UAP Kenya registered operating margins of 13.9% and 3.2%, respectively (1H F20: 9.1% and 9.1% respectively) in 1H F21, supported by a recovery in the equities market outbalancing high underwriting pressures experienced by the core entity. Notably, the group’s five-year operating margin contraction to 2.0% in FY20 (FY19: 3.4%) was mainly due to one off operating costs and equity write-downs. During FY20, the group impaired dividends worth about KES1bn. Further, about KES0.5bn was incurred on costs related to balance sheet restructuring, impairment of UAP Life Assurance Uganda and withholding tax provisions. In this respect, the group’s operating expense ratio increased to 45.0% (FY19: 37.1%). In addition, the entity wrote down its equities by about KES314m (FY19: KES772m gain) following the poor performance of the stock market in FY20 and the depreciation of the local currency, coupled with increased debt burden, as finance costs continued to increase over the five-year review period to KES1.3bn (FY16: KES553.2m), moderating the average return on revenue to -4.9% (FY19: -2.2%). This notwithstanding, UAP Kenya remained resilient to the COVID 19 pandemic, offering competitive rates with an effort to scaling up on higher underwriting margin classes. As such, the insurer registered positive underwriting results in the last four years coupled with high retention. This resulted in a turnaround in the five-year underwriting performance (FY20: 0.7%; FY19: -0.9%) and average return on revenue improving to 6.9% (FY19: 6.0%). We expect the improvements to be reinforced by sound investment income.
The rating is supported by the group’s business profile, underpinned by significant premium growth in UAP Kenya and UAP Old Mutual Insurance Uganda Limited (“UAP Old Mutual Uganda”) coupled with the acquisition of Old Mutual Life Assurance Company Limited by UAP Life Assurance Limited and a highly diversified group network. Building on entrenched market relationships and competitiveness in the medical book, UAP Kenya increased its market share to 8.1% (FY19: 7.1%) achieving lead position in the Kenyan short term insurance market. UAP Old Mutual Uganda, UAP Insurance South Sudan limited and UAP Insurance Rwanda limited are also leading players in respective markets. The group’s premium diversification is deemed to be high in absolute terms, with five lines of business contributing materially at gross level and four at net level. Looking ahead, the group’s ability to sustain the current increase in market share while improving the quality of the book, could be positive to the business profile assessment.
The group derives support from the wider Old Mutual group (Old Mutual Limited and its subsidiaries) given history of financial support, strategic and operational integration.
The Stable Outlook reflects expectations of the current credit profile to be sustained at similar levels in the near-term, underpinned by the expected balance between investment income and finance costs. Furthermore, financial flexibility with regards to the refinancing of medium-term facilities, together with support from the Old Mutual Limited group, and a gradual improvement in group net earnings are expected to reduce downside risks. We expect elevated exposure to investment property to continue over the medium term, given execution risks in the environment, albeit with the reduction of the cost of carrying the investments likely to limit further pressure on the group’s credit profile.
Positive rating action is unlikely over the short term. However, a positive assessment over the medium term is likely to follow 1) Controlled near and medium-term liquidity risks relating to the loan facilities in line with expectations; and 2) A substantial reduction in investment property exposure relative to capital and/or if rental yields are favourably matched with finance costs, reducing capital concentration and improving profitability. The ratings could be downgraded if existing concerns on execution risks pertaining balances sheet restructuring persist, leading to continued high debt and property exposures, which further impact liquidity and risk adjusted capitalisation over the medium term.
|Primary analyst||David Mungai||Analyst: Insurance Ratings|
|Nairobi, KE||DavidM@GCRratings.com||+254 73 218 8669|
|Committee chair||Godfrey Chingono||Sector Head: Insurance ratings|
|Johannesburg, ZA||GodfreyC@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, August 2021|
|GCR Insurance Sector Risk Scores, September 2021|
UAP Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Claims paying ability||Initial||National||AA(KE)||Stable Outlook||June 2007|
|Financial strength||Last||National||A+(KE)||Rating Watch Negative||November 2020|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||3.50|
|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.|
|Property||Movable or immovable asset.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Real Estate||Property that consists of land and / or buildings.|
|Receivables||Any outstanding debts, current or not, due to be paid to a company in cash.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|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.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
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 is based solely on the merits of 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.
Subsequent to an appeal by the rated entity, the national scale financial strength rating and outlook were revised as reflected in the announcement. The credit rating has been disclosed to the rated entity. 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. 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 rated entity and other reliable third parties to accord the credit rating included:
- Audited group and company financial results as at 31 December 2020
- Four years of comparative group and company audited financial statements to 31 December
- Full year group and company budgeted financial statements for 2021
- Unaudited group and company interim results to 30 June 2021
- Company valuation and FCR reports as at 31 December 2020
- Company reinsurance cover notes for 2021; and
- Other relevant documents.