GCR affirms UAP Insurance Company Limited’s rating at AA-(KE); Outlook Stable.

10 Jul 2017 In Rating Notifications

GCR affirms UAP Insurance Company Limited’s rating at AA-(KE); Outlook Stable.

Johannesburg, 10 July 2017—Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to UAP Insurance Company Limited of AA-(KE), with the outlook accorded as Stable. The rating is valid until June 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating to UAP Insurance Company Limited (“UAP Kenya”) based on the following key criteria:

UAP Kenya’s standalone credit profile is viewed to benefit from implied shareholder support, following the rebranding exercise undertaken in FY16. In this respect, UAP Kenya is a wholly owned subsidiary of UAP Holdings Limited, which in turn is majority-owned by South African based Old Mutual Plc. (“the group”). The rating upliftment therefrom has served to offset the negative impact of a downwards moderation in earnings capacity on the insurer’s financial profile.

Earnings capacity is viewed to have moderated downwards to an intermediate level from moderately strong levels. In this regard, the insurer’s underwriting margin equated to -3% in FY16 (FY15: -6%, review period average: 3%). Despite the normalisation in operating expenses, a sustained elevated claims ratio of 69% (mainly owing to the motor book) has resulted in consecutive underwriting deficits. Going forward, management expects cost efficiencies and an improved loss ratio (65%) to facilitate an underwriting surplus in FY17. GCR has factored in this improvement in the expected profit trajectory into the rating and outlook, noting the potential for a sustained weakening in earnings capacity to negatively impact the entity’s credit profile going forward.

Risk adjusted capitalisation has been measured at strong levels, supported by the sizeable capital base catering for the quantum of market and insurance risks. In this respect, non-cash investments pertain to sizable exposures to listed shares and investment property (accounting for 67% of FY16 capital). Nonetheless, this level is considered manageable in view of the insurer’s current risk absorption capacity. The international solvency margin remained high, albeit registering at a lower 87% at FY16 (FY15: 117%), given the substantial increase in the risk base outpacing capital growth. GCR expects the insurer’s risk adjusted capital adequacy to remain within a moderately strong range over the rating horizon, supported by sound internal capital generation.

UAP Kenya reflects strong competitive positioning, supported by strong brand recognition and new product offerings. The insurer has developed a well-established franchise and solid market position (second largest in terms of industry gross premiums) in a highly competitive industry, cemented by its demonstrated ability to enhance its premium base at a consistently robust pace. UAP Kenya’s position within a large and entrenched regional group is viewed to further augment its market presence, with potential enhancement stemming from increased involvement from Old Mutual Plc.

Liquidity metrics registered at a moderately strong level, with cash coverage of net technical liabilities equating to a stable 0.7x at FY16, and claims cash coverage equated to a high 10 months at FY16 (FY15: 11 months). Going forward, liquidity metrics are expected to be maintained at the similar levels, underpinned by the asset allocation prescribed by the regulator.

Earnings diversification is aligned with industry norms, with the medical and motor portfolios dominating the net premium base, at a combined 88% of the risk base. Nonetheless, this is offset by the granularity of premiums and the low product risk associated with the classes. UAP Kenya’s reinsurance counterparties reflect a moderately strong level of aggregate strength, whilst deductibles are limited to levels which are viewed to be conservative relative to FY16 capital.

The rating currently matches the national scale ceiling applicable to entities operating within the Kenyan insurance industry. In this regard, positive rating action may follow an assessment of country and industry risk factors. The rating exhibits negative sensitivity to weakening profitability, a reduction in liquidity, or a lowering in risk based capital adequacy.

 

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (June 2007)    
Claims paying ability: AA(KE)    
Outlook: Stable    
     
Last rating (June 2016)    
Claims paying ability: AA-(KE)    
Outlook: Stable    

 

 

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Munyaradzi Mushure   Yvonne Mujuru
Credit Analyst   Sector Head: Insurance Ratings
(011) 784-1771   (011) 784-1771
.(JavaScript must be enabled to view this email address)   .(JavaScript must be enabled to view this email address)

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Short Term Insurance Companies, updated July 2016

UAP Insurance Company Limited Rating Reports, 2007 - 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. 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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

UAP Insurance Company 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 Company Limited with no contestation of the rating.

The information received from UAP Insurance Company Limited and other reliable third parties to accord the credit rating included:

  • Audited financial results to 31 December 2016
  • Unaudited year to date results to 30 April 2017
  • Budgeted financial results to December 2017
  • Reinsurance cover notes 2017
  • Actuarial Valuation 2016
  • Financial Condition Report 2016
  • Other relevant company specific information

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.

 

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY

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.
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.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Deductible The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.
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.
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.
Financial Flexibility The company’s ability to access additional sources of capital funding.
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.
Investment Income The income generated by a company’s portfolio of investments.
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.
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
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.
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.
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.
Stop Loss Any provision in a policy designed to cut off an insurer’s losses at a given point. In effect, a stop loss agreement guarantees the loss ratio of the insurer.
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.

For a detailed glossary of terms please click here

 

 

 

 

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