Nairobi, 24 June 2021 – 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|
The rating affirmation reflects the insurer’s strong earnings, which have supported sustained strength in risk adjusted capitalisation and liquidity. These positive factors are offset by a weak business profile.
Earnings are a positive rating factor. In spite of a decline in gross premiums as a result of the Covid-19 pandemic (FY20: UGX 24.8bn, FY19:25.8bn), underwriting profitability improved on the back of higher retention (FY20: 30.3%, FY19: 24.1%), reduced operating costs (FY20: UGX5.2bn, FY19: UGX6.6bn) and increased commission income (FY20: UGX3.8bn, FY19: UGX2.9bn). For FY21, net profitability is expected to rise by c.10% supported by high commission recoveries and strong premium growth, translating into a cross cycle underwriting margin of around 24% and net margin of around 33% (although reflecting high year-on-year volatility).
Both capitalisation and liquidity are also positive to the ratings. The GCR CAR measured at 4.6x at FY20 (FY19: 3.6x), supported by the low risk retention operating model, improved profitability and earnings retention. The liquidity metrics were sustained at strong levels, with cash and stressed assets coverage of net technical liabilities measuring at 5.1x (FY19: 5.0x). Furthermore, operational cash cover was maintained above 50 months. We moderated the liquidity score due to our concerns about the banking counterparty concentration, noting that the largest and second largest banks hold 55% and 27% of bank deposits, respectively.
With a market share of 3.7% in FY20 (FY19: 4.2%), Goldstar’s competitive position measures within a moderately weak range reflecting the company’s targeted business approach with a focus on big projects and corporate clients. Premium diversification is a rating negative due to the insurer’s limited premium scale and limited distribution channels. Goldstar relies on long standing client facing relationships which generate a significant proportion of premiums through direct sales (FY20: UGX12.3m), almost at par with brokers (FY20: UGX14.5m). Going forward, premium diversification is expected to remain constrained given the insurer’s business strategy.
Our management and governance assessment restrains the ratings, reflecting the concentration of 100% shareholding in a single family that holds significant direct board representation and board leadership through the Chairman. GCR notes that the company is in the process of increasing the number of independent board members and will continue to assess the risk management development as a key input in determining board balance and effectiveness.
The Stable Outlook reflects the insurer’s sustained strong risk adjusted capitalisation, liquidity and earnings assessment, which are not expected to change materially. This is counterbalanced by a weak business profile, as market share and premium scale are expected to remain limited.
A rating upgrade could follow a material improvement in the business profile and a reduction in banking counterparty concentration, or if earnings stabilise at strengthened levels. The rating could be downgraded on the back of a sustained deterioration in the business profile or if earnings weaken below expectations.
|Primary analyst||Eleanor Kigen||Senior Analyst|
|Nairobi, KE||EleanorK@GCRratings.com||+254 703 041618|
|Committee chair||Susan Hawthorne||Senior Analyst: Insurance|
|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|
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||July 2020|
Risk score summary
|Rating Components and Factors||Risk score|
|Country risk score||3.25|
|Sector risk score||3.75|
|Management and governance||(1.00)|
|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 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 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.