Johannesburg, 23rd October 2019 – GCR Ratings (“GCR”) has upgraded Uganda Reinsurance Company Limited’s (“Uganda Re”) national scale financial strength (formerly claims paying ability) rating to A(UG) from A-(UG), with the Outlook accorded as Positive.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Uganda Reinsurance Company Limited||Financial strength||National||A(UG)||Positive Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Uganda Re was placed ‘Under Criteria Observation’. GCR finalised the review for Uganda Re under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Uganda Re has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The rating upgrade for Uganda Re is underpinned by a sustained improvement in earnings capacity, which bolstered the reinsurer’s capacity to maintain risk adjusted capitalisation within current robust levels over the medium term. The emergence of positive earnings early in the growth stage is viewed to cater for potential risks from the reinsurer’s elevated growth trajectory within Uganda, along with plans for enhanced regional visibility, and increasing regulatory suasion for high levels of risk retention. The Positive Outlook reflects the potential for a further strengthening in earnings capacity, which together with a cash and carry premiums regime, could increase liquidity strength over the rating horizon.
The improvement in earnings capacity to an intermediate range, from previously weak ranges, is a product of loss ratio remediation in major lines and a moderation in net business acquisition costs. The reinsurer’s loss ratio was managed down to 50% from 68% at the start of the review period, while the net commission ratio reduced to 24% in FY18 from a review period high of 38%. Accordingly, the three year underwriting margin measured at 7% (FY18: 16%). Although the recent earnings cycle could secure profit margins within a strong range over the rating horizon, this would need to be supported by a further cementing of drivers to reduce earnings risk.
The reinsurer has maintained very low exposure to both market and counterparty risk, rendering the relatively high level of underwriting risk exposure highly manageable at current capital levels. In this regard, risk adjusted capitalisation measured within a very strong range, with the potential dilution from underwriting risk growth likely to be moderated by the recent improvement in internal capital generation to a 19% return on equity at FY18 (prior four year average: 12%), and a prudent initial dividend pay-out ratio of 23%.
Historically high levels of reserving, on the back of elevated claims, pivoted liquidity within a moderately strong range over the review period. Accordingly, the reinsurer’s cash and stressed assets covered net technical liabilities by 2x (FY17: 1.8x) and operational cash requirements by 30 months (FY17: 25 months) at FY18. The recent increase in metrics is driven by increased cash generation from operations, with the sustainability of the trend contingent on working capital requirements of expected business growth and the cash impact of dividend declarations which incepted in FY18.
The business profile is anchored by mandatory cessions of 15% on domestic treaty business that consign the reinsurer to a strong competitive position. This is however moderated by limited scale and product diversification. The reinsurer’s market share of short term industry cessions measured at 13% in FY18 and is expected to increase on the back of a strong growth trajectory (Budget 19: 23%; FY18: 16%), with select lines evidencing significant growth potential. Accident was the major retained line of business in FY18, while property and life risks (dominated by group life) provided some level of diversification, albeit at fairly limited scale. GCR expects the reinsurer’s business profile to remain unchanged over the rating horizon, given limitations placed on geographic diversification by competitive dynamics in the region.
The Positive Outlook reflects GCR’s expectations of a sustained improvement in earnings capacity and liquidity over the rating horizon.
Growth strain that results in the erosion of liquidity could result in the rating outlook reverting to stable or a rating downgrade.
|Primary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YMujuru@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 2019|
|GCR Insurance Sector Risk Scores, July 2019|
Uganda Reinsurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(UG)||Stable||September 2018|
Risk Score Summary
|Risk score||Uganda Reinsurance Company Limited|
|Country risk score||3.50|
|Sector risk score||3.75|
|Management and governance||0.00|
|Accident||An unplanned event, unexpected and un-designed, which occurs suddenly and at a definite place.|
|Agency||An insurance sales office which is directed by an agent, manager, independent agent, or company manager.|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Captive Insurance Company||A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Catastrophe||An event, which causes a loss of extraordinary magnitude.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Experience||A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.|
|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.|
|Facultative||Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|International Scale Rating LC||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.|
|Interest||Money paid for the use of money.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Net Retention||The amount of insurance that a ceding company keeps for its own account and does not reinsure.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Personal Lines||Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|Policyholder||The person in actual possession of an insurance policy.|
|Pool||An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Reinstatement||The resumption of coverage under a policy, which has lapsed.|
|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.|
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 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.
The credit rating has been disclosed to Uganda Reinsurance Company Limited. 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.
Uganda Reinsurance Company Limited participated in the rating process via face-to-face 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 Uganda Reinsurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial statements as at 31 December 2018;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2019;
- Reinsurance cover notes for 2019;
- Other relevant documents.