Announcements Insurance Rating Alerts

GCR affirms Goldstar Insurance Company Limited’s national scale financial strength rating of A+(UG); Outlook Stable

Rating action

Johannesburg, 07 July 2020 – GCR Ratings (“GCR”) has affirmed Goldstar Insurance Company Limited’s (“Goldstar”) national scale financial strength rating of A+(UG); Outlook Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Goldstar Insurance Company Limited Financial strength National A+(UG) Stable Outlook

Rating rationale

The rating affirmation reflects the insurer’s very strong financial profile, characterised by very strong risk adjusted capitalisation and liquidity, while the strong earnings capacity assessment factors in an expected normalisation in underwriting profitability and continued sound net earnings. Offsetting these strengths are weakness in the business profile.

Goldstar’s robust financial profile is a function of strong capital generation from operations and a low risk retention operating model, albeit with high banking counterparty concentration factoring into GCR’s view of capital and liquidity management. The insurer’s strong earnings have been largely driven by low deductibles on a quality gross book, generating high net commission recoveries. The underwriting margin moderated to a negative 1.3% in FY19 (FY18: 13%; prior three year average: 37%) following successive increases in the operating expense ratio and a developing higher loss ratio trend stemming from growth into high claiming lines. The earnings assessment nevertheless considered changes to the reinsurance structure that are expected to restore historical underwriting margin trends through enhanced commission recoveries. Very strong historical internal capital generation has built a level of capital redundancy in the capital base, with the GCR capital adequacy ratio measuring at a high 4.3x at FY19 (FY18: 3.9x), benefiting from a conservative investment portfolio, relatively limited credit exposures and very low underwriting risk exposures. Similarly, liquidity strength is reflected in cash and stressed assets coverage of net technical liabilities of a high 5.1x (FY17: 5.6x), and operational cash coverage of 28 months (FY18: 35 months). Overall, headroom in the financial profile metrics is viewed to comfortably absorb the base case impact of the COVID-19 pandemic.

Goldstar’s competitive position measures within a moderately weak range, reflecting the insurer’s focus on niche markets and non-participation on select risks. Gross premiums equated to a stable USD7m in FY19 and are likely to measure at USD6.6m at FY20 due to the COVID-19 impact, with market share and relative market share likely to be maintained around 4% and 0.9x respectively. The insurer’s market position is supported by long standing client facing relationships which generate a significant proportion of premiums through direct sales, almost at par with brokers, giving access to diverse market mandates within the predominant corporate segment. In tandem with limited gross premium scale, premium diversification is expected to remain at very low levels, albeit with the uptake of small to medium sized risks ensuring some level of policyholder diversification.

Our management and governance assessment restrains the ratings, reflecting the concentration of 100% shareholding in a single family that holds significant direct board representation. GCR notes the balancing brought by independent directors who joined the company in FY17 and will continue to assess the risk management development as a key input in determining board balance and effectiveness.

Outlook statement

The Stable Outlook reflects the entrenched nature of the insurer’s limited business profile, which although under pressure from new market entrants, has remained unchanged. The financial profile exhibits significant headroom within the GCR CAR and liquidity ratio metrics which are expected to measure above 3x and 4x respectively over the medium term, after taking into account short term stresses from the COVID-19 pandemic. The average underwriting margin could lower to a 13% to 18% range over the medium term should cost reduction initiatives fail and the average return on revenue is likely to remain above 20%, supporting the current rating, all else equal.

Rating triggers

An improvement in the business profile would be positive to the rating as well as a reduction in banking counterparty concentration. The rating could be downgraded on the back of a material and/ or sustained reduction in the business profile and earnings.

Analytical contacts

Primary analyst Godfrey Chingono Deputy Sector Head: Insurance
Johannesburg, ZA GodfreyC@GCRratings.com +27 11 784 1771
Committee chair Susan Hawthorne Senior Analyst
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, May 2020
GCR Insurance Sector Risk Scores, June 2020

Ratings history

Goldstar Insurance Company Limited

Rating class Review Rating scale Rating class Outlook/Watch Date
Claims paying ability Initial National A(UG) Stable Outlook May 2007
Financial strength Last National A+(UG) Stable Outlook October 2019

Risk score summary

Rating Components and Factors Risk score
Operating environment 7.00
Country risk score 3.25
Sector risk score 3.75
Business profile (2.75)
Competitive position (0.25)
Premium diversification (1.50)
Management and governance (1.00)
Financial profile 4.25
Earnings 1.25
Capitalisation 1.50
Liquidity 1.50
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 8.50

Glossary

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 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 the entity and other reliable third parties to accord the credit rating included:

  • Audited 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 31 March 2020;
  • Reinsurance cover notes for 2020; and
  • Other relevant documents.
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