Johannesburg, 30 June 2021 – GCR Ratings (“GCR”) has upgraded Uganda Reinsurance Company Limited’s (“Uganda Re”) national scale financial strength rating to A+(UG), from A(UG), with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Uganda Reinsurance Company Limited||Financial strength||National||A+(UG)||Stable Outlook|
Uganda Re’s national scale financial strength rating has been upgraded on the back of solid growth in the capital base, offsetting growing exposures to credit risks arising from Covid-19 market pressures. Underpinned by conservatively invested capital, earnings are intermediate, and liquidity is assessed at moderately strong levels, with susceptibility to economic dampening effects of the Covid-19 pandemic likely to be well contained within current rating buffers. The competitive position remains neutral, with the reinsurer displaying gradual convergence in scale with regional peers, albeit negated by limited premium diversification due to developing product and market diversification efforts.
Risk adjusted capitalisation is robust, with strong growth of the capital base (5-year annual average growth rate of 21.6%) to UGX40.7bn (c. USD11m) supporting a GCR capital adequacy ratio (“CAR”) of above 3x (FY19: 2.9x). Correspondingly, regulatory solvency measured well above the minimum CAR of 200%. The capital buffers are mainly driven by profit capitalisation, supported by the issuance of scrip dividends. In this regard, the capital base is viewed to provide a level of redundancy over underwriting risk capital requirements, given limited market risk, potentially supporting the reinsurer’s aggressive premium growth objectives over the medium term. However, attendant increases in credit exposures to cedants following the increase in reinsurance receivables to UGX15bn (FY19: UGX6.6bn), while tolerable over the short term, represent a key risk over the medium to longer term.
Due to the growth in receivables and increasing underwriting risk uptake (translating to higher net technical reserves), liquidity measured within a healthy range, with metrics slightly moderating in line with expectations. In this respect, liquidity coverage measured at 1.8x at FY20 (FY19: 2.1x), with the downside limited by cash preservation through the issuance of scrip dividends, reduced risk retention and continued conservative investing. In our view, liquidity coverage is likely to be maintained around current levels, given enhanced premium collection efforts, supported by statutory leverage over cedants through licence renewal clearances.
Earnings improved relative to expectations in FY20, largely supported by prudent retrocession cover. This followed a reduction in the retention on high claiming medical risks, which contributed to margin suppression in recent years. Accordingly, the review year underwriting margin measured at 5.7% (FY19: 5.2%; FY18: 16.3%), compared to our 0% to 4% projections. We believe the continued implementation of loss limiting measures, especially in medical and motor portfolios, could stabilise underwriting margins within the 4% to 7% range. Investment income provides significant support to returns on revenue (>20% over the past three years), with placements in government securities expected to support investment yields, despite a slight moderation of obtainable interest rates on government securities going forward. In this respect, the reinsurer’s ability to restructure problem portfolios and grow the investment portfolio could be positive to the rating over the medium term.
Uganda Re’s competitive position is neutral. This reflects the balance between the reinsurer’s preferred reinsurer status through 15% mandatory cessions on treaty business and significant onboarding of voluntary business, against relatively low premium scale compared to peer reinsurers. The reinsurer accounted for a market share of 17.4% (FY19: 16.5%) of aggregate primary market cessions with voluntary business (52% of gross premiums in FY20 vs. 43% in FY19) from cedants further building on secure flows from mandatory cessions. However, the premium base remained limited relative to similarly structured regional peers at a scale of c. USD17m. We note sustained strong growth in gross premiums (FY20: 21.2%; FY19: 50%) past the start-up phase as a strength, particularly driven by participation on additional treaty business and facultative risks. Going forward, growth could moderate due to the adverse impact of Covid-19 on insurance uptake, albeit, in our view, remaining persistent enough to progress the premium base above USD20m over the medium term.
Uganda Re’s focus on the domestic market, where it derives 95% (FY19: 98%) of gross premiums, limits the reinsurer’s capacity to diversify high value risks. The external book is still in its infancy, growing mainly through reciprocal business. Single market concentration therefore offsets the reinsurer’s wide participation on cedants in the domestic market and the underlying diverse risk base. The business mix is dominated by fire, medical and accident risks, with growth in the life business expected to further add to diversification over the medium term.
The Stable Outlook is premised on the credit profile’s tolerance of risks arising from the operating environment, due to increasing Covid-19 risks. The GCR CAR of above 3x is viewed to absorb stressed scenario risks on aged receivables without diminishing our capitalisation assessment. While earnings are assessed at levels consistent with the rating, liquidity is susceptible to an increase in reinsurance receivables, a trend that could be prolonged by subsequent waves of Covid-19 infections. However, the rating can tolerate a slight moderation in liquidity. The business profile is resilient, given the reinsurer’s structurally beneficial position (through mandatory cessions) and growth in voluntary business uptake, which will likely maintain relativity with peers over the medium term.
The rating could be upgraded if liquidity improves from the current levels and earnings strength is sustained. A rating downgrade could arise from a material reduction in earnings capacity and/ or liquidity.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@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, June 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Uganda Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(UG)||Stable Outlook||September 2018|
|Financial strength||Last||National||A(UG)||Positive Outlook||June 2020|
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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|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.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Upgrade||The rating has been raised on its specific scale.|
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 party. 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 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 results as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2021;
- Unaudited interim results to 31 March 2021;
- Reinsurance cover notes for 2021; and
- Other relevant documents.