Johannesburg, 23rd October 2019 – GCR Ratings (“GCR”) has affirmed Goldstar Insurance Company Limited’s (“Goldstar”) national scale financial strength (formerly claims paying ability) rating of A+(UG), with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Goldstar Insurance Company Limited||Financial strength||National||A+(UG)||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Goldstar Insurance Company Limited was placed ‘Under Criteria Observation’. GCR finalised the review for Gold Star Insurance Company Limited under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Goldstar Insurance Company Limited has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The rating affirmation reflects the insurer’s very strong financial profile, characterised by very strong risk adjusted capitalisation and liquidity, while strong earnings capacity, factoring in recent volatility, is expected to remain supportive of rating strength. Offsetting these strengths are weak governance structures and a very limited business profile.
Goldstar has maintained risks at very low levels over the review period, rendering its capital base more than adequate. In addition, this insurer has consistently generated strong capital from operations, albeit with a sizeable dividend in FY16 impeding the review period trend. While risk to capital is a consideration given a very high dividend in FY16, management has indicated that there is no intention to pay dividends currently. Going forward, risk adjusted capitalisation is expected to measure within a strong range, with a potential strengthening in metrics from cash and carry regulations likely to be offset by exposure to property investments that are expected to start towards the end of FY19.
The insurer’s low risk retention model embeds very low levels of net technical liabilities, while a prudent investment strategy, amidst relatively strong cash flow generation from operations, solidifies liquidity strength within a very strong range. In this regard, cash and stressed financial assets equated to 5x of net technical liabilities, while operational cash coverage measured at 35 months (FY17: 25 months) at FY18. Nonetheless, single banking counterparty concentration is elevated (albeit noting the sound credit strength of the counterparty), offsetting liquidity strength. While the aforesaid property project is going to be financed from internal resources, GCR expects current liquidity buffers to tolerate the expenditure.
Earnings capacity is viewed to be strong, supported by a very competitive loss ratio and high commission recoveries, a function of very low deductibles on the reinsurance program. In this respect, the five year underwriting margin equated to 32% (FY18: 13%), with the review year reduction attributable to growth into unprofitable lines. A high yielding portfolio of liquid assets supported margins throughout the review period, with the five year return on revenue averaging above 40%. The insurer is expected to continue registering good profits over the outlook horizon, benefiting from both favourable industry factors and a currently efficient technical structure that trades off well with inherently low scale efficiencies in the operating model.
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 measured at USD6.8m in FY18 (FY17: USD6.1m), which translated into a market share of 4% and relative market share of 0.9x an average insurer in the domestic short term insurance industry. 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. The insurer’s competitive position is expected to measure within a similar range, given selective risk uptake. In tandem with limited gross premium scale, premium diversification is expected to continue at very low levels, albeit with the uptake of small to medium sized risks ensuring some level of policyholder diversification.
Management and governance is viewed to be moderately weak, acting as a constraint to the rating, due to lack of board independence. While GCR notes the appointment of two non-executive directors in FY17, board independence is viewed to be limited relative to assessed corporate governance risks. In this regard, the management of corporate governance structures in line with the development of the business is a key rating consideration over the medium term.
The Stable Outlook reflects the entrenched nature of the insurer’s low business profile and strong financial profile, which are likely to balance off at current levels over the medium term.
An improvement in business scale and the governance of the company 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 weakening in risk adjusted capitalisation and/ or liquidity metrics. Furthermore, GCR may take an additional negative view on governance should changes in the environment require operational or regulatory changes that are not matched by governance structures in place, considering current rating levels.
|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|
Goldstar Insurance Company Limited
|Rating class||Review||Rating scale||Rating class||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A(UG)||Stable||May 2007|
Risk Score Summary
|Risk score||Goldstar Insurance Company Limited|
|Country risk score||3.50|
|Sector risk score||3.75|
|Management and governance||(1.00)|
|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 Goldstar Insurance 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.
Goldstar Insurance 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 Goldstar Insurance 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.