Rating action

Nairobi, 18 November 2020 – GCR Ratings (“GCR”) has affirmed UAP Insurance Limited’s (“UAP Kenya”) national scale financial strength rating of A+_(KE), with the rating placed on Negative Rating Watch.

Rating rationale

UAP Kenya national scale financial strength rating reflects the strengths and weaknesses of the consolidated UAP Holding Plc’s (“the group”) as the core operating entity of the group, with a contribution of 50% and 27% of gross premiums and assets respectively at FY19. As such, the analysis also captures the potential for tangible risk transfer across consolidated subsidiaries.

The Negative Rating Watch reflects the sustained deterioration in group earnings, which resulted in a material weakening in risk adjusted capitalisation. In this respect, despite support from a strong business profile, the overall credit profile of the group moderated, further depressed by a weakening operating environment. Therefore, in the midst of exacerbated economic challenges, the group’s earnings are likely to remain subdued, resulting in a depressed GCR capital adequacy ratio (“CAR”) of around 1.0x. Furthermore, cognisance is taken of loan facilities maturing over the rating horizon, presenting additional burden on fragile group earnings, which may lower liquidity assessment.

The group’s earnings represent a key rating weakness, adversely impacted by property fair value losses, which offset insurance subsidiaries’ improvements in earnings. The group registered cumulative net losses amounting to KES3.9bn over the past two years, largely due to fair value losses on investment properties. The weak group profit outturn was in spite of UAP Kenya recording better underwriting and net profits (FY19: KES180m and KES971m; FY18: KES7m and KES172m respectively) as operational efficiencies increase. Therefore, we expect the group’s bottom-line earnings to register around breakeven levels, excluding fair value movements which are vulnerable to adverse market movements stemming from the weak economic environment and COVID-19 pandemic risks. However, the earnings assessment is likely to be maintained within the same range, in the absence of material changes to market risk exposures.

The group’s risk adjusted capitalisation weakened, driven by material earnings deterioration since FY17, which offset UAP Kenya’s sound capitalisation assessment evidenced by a statutory solvency of 215% at FY19 (FY18: 149%). Risk adjusted capitalisation has been on a downward trend over the past three years, further pressured by a reduction in the capital base at FY19, which closed at 13.8bn (FY18 17.2bn). Consequently, the GCR CAR reduced to 1.2x compared to strong levels around 1.5x between FY15 and FY18. The rating is therefore sensitive to management’s ability to de-risk the balance sheet and improve capital adequacy levels to a rating adequate range over the outlook horizon.

Liquidity is viewed to be credit positive, with the group’s cash and stressed financial assets coverage of net technical obligations improving to around 1.7x at FY19 (FY18: 1.4x), while the coverage of operational cash requirements equated to 13 months (FY18: 11months). Although GCR expects liquidity metrics to be maintained within similar levels over the rating horizon, the liquidity assessment also considers the refinancing of the Stanbic loan which may trigger negative rating action if it results in additional liquidity burden.

The business profile is viewed to be strong, supported by a strong market position in Kenya, Uganda, and South Sudan, where the group’s subsidiaries rank among top three market players. Furthermore, the group is well diversified across three lines of business, noting a distinctive advantage in the medical business. In this respect, GCR expects the market leading positions to be maintained in the three jurisdictions, leveraging off the group’s strong expertise and ecosystem in East Africa for competitive premium scale growth.

The group derives support from the wider Old Mutual Group Holdings (SA) Limited through Old Mutual (Africa) Limited, given a history of financial support, strategic and operational integration, as well as brand alignment. Evidence of support includes the revolving multicurrency facility that supports subsidiaries in the event of a liquidity crisis and ongoing balance sheet de-risking initiatives encompassing the transfer of investment properties to a property SPV; refinancing of select facilities; and the conversion of some debt to equity.

Outlook statement

The Negative Ratings Watch balances short-term refinancing risk and the vulnerable capital position of the group against anticipated shareholder support over the next six to nine months. GCR anticipates that the short-term refinancing risk will be alleviated by the structuring debt facilities similar to existing ones and shareholder loan conversions, with both remedies expected to lower pressure on liquidity and capitalization. Furthermore, GCR expects the shareholder to deal with the longer-term property exposures, which has been driving financial profile risks. Should the shareholder fail to address the concerns according to expectations, potential earnings pressures may persist; notably from the property business, which is likely to result in depressed risk adjusted capitalisation, with the group’s GCR CAR potentially measuring below 1x (which could result in a multiple notch downgrade).

Rating triggers

The rating may be downgraded if group earnings and/or risk adjusted capitalisation remain depressed within the current range, with core net profits remaining around breakeven level. The rating may also be downgraded in six months should the loan refinancing process not take effect, especially if this negatively impacts liquidity. Positive rating action is unlikely over the short term, although the Outlook could revert to Stable if risk adjusted capitalisation and earnings increase to a rating adequate range, while liquidity risks are sufficiently managed.

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UAP Insurance Limited

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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.

Subsequent to an appeal by the rated entity, the rating and outlook were revised as reflected in the announcement. 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 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 entities and other reliable third parties to accord the credit rating included:

• Draft financial results as at 31 December 2019;
• Four years of comparative audited financial statements to 31 December
• Full year budgeted financial statements for 2020;
• Unaudited interim results to 30 June 2020; and
• Other relevant documents.

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