Johannesburg, 02 December 2019 – GCR Ratings (“GCR”) has affirmed Standard Insurance Co., INC’s (“Standard Insurance”) national scale financial strength (formerly claims paying ability) rating of A(PH), with a Stable Outlook. GCR has also affirmed the international scale financial strength (formerly claims paying ability) rating on Standard Insurance of BB, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Standard Insurance Co., INC||Financial strength||National||A(PH)||Stable Outlook|
|Financial strength||International||BB||Stable Outlook|
GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the ratings for Standard Insurance were placed ‘Under Criteria Observation’. GCR finalised the review for Standard Insurance under the released Criteria for Rating Insurance Companies, May 2019. As a result, the ratings for Standard Insurance have been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.
The ratings on Standard Insurance reflect the strengths and weaknesses of the wider Echauz Holdings Corporation (“EHC”) group. Standard Insurance is the core operating entity within the group, accounting for 100% of total gross premiums and 99% of group assets. The group has a strong financial profile supported by very strong capitalisation and moderately sound earnings. These credit positives are somewhat tapered by intermediate liquidity strength. The group’s business profile is impacted by somewhat limited premium diversification.
Capitalisation was maintained at a very strong level, with the large capital base and low level of underwriting risk and market exposures giving rise to very high levels of risk adjusted capitalisation. Risk adjusted capitalisation is expected to be sustained at similar levels over the outlook horizon, supported by sound earnings potential and the absence of dividend pay-outs. This is expected to preserve the sizeable capital base capable of supporting the quantum of underwriting exposure.
The group’s earnings capacity is largely a function of Standard Insurance’s strong earnings, albeit tapered by the rest of the subsidiaries’ performance. The insurer reflected stable and consistent underwriting profits, partially mitigating limited upside from investment returns. In this respect, the five year aggregated underwriting margin equated to 7% (FY18: 6%; FY17: 8%), while the investment yield averaged 0%. Stable underwriting performance has been supported by a competitive loss experience, derived on the back of advanced risk modelling, multi-phase claims management, and established service provider relationships. In GCR’s view, earnings strength is likely to be sustained at similar levels over the outlook horizon.
The group’s competitive position is underpinned by Standard Insurance’s moderately strong competitive positioning. In this respect, the insurer was able to sustain its ranking amongst the top 10 players in the domestic market, with an estimated 4% of total short term insurance industry premiums, and relative market share of 2.7x. Moderately strong positioning was supported by the insurer’s market leadership in the motor business, with Standard Insurance’s extensive branch network and large pool of contracted car dealerships driving sound premium generation in this class. GCR expects the insurer to continue to defend its top tier position in motor insurance, in line with strategic objectives.
The insurer has a somewhat diversified portfolio, with two classes of business contributing materially to premiums. Note is taken, however, of the heavy reliance on motor, given the strategic focus and competitive advantage in this class. Nevertheless, high product concentration is partially mitigated by the high policy count (with the top five policyholders combined accounting for less than 2% of gross premiums) and relatively low product risk associated with this class (given management’s historical track record in sustaining motor profitability). Nevertheless, geographic diversification is viewed to be limited, given that all the premiums are locally sourced.
Liquidity metrics are intermediate, as evidenced by stressed financial asset coverage of net technical liabilities of 1.3x (FY17: 1.4x), and operational cash coverage of 12 months (FY17: 13 months). GCR expects liquidity measures to remain within similar range, supported by stable asset allocation and sound cash flow generation potential.
The Stable Outlook reflects expectations that the financial profile will continue to be supported by very strong capitalisation and sound earnings, while the business profile is not expected to change materially over the outlook horizon.
Positive rating action may stem from sustained improvement in earnings and/or liquidity. This would need to be supported by risk adjusted capitalisation remaining at very strong levels. Conversely, downward rating pressure may arise from a material reduction in capitalisation, or from a sustained weakening in earnings.
|Primary analyst||Yvonne Mujuru||Sector Head: Insurance Ratings|
|Johannesburg, ZA||YMujuru@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Siyuan Lu||Associate Analyst|
|Johannesburg, ZA||SiyuanL@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Analyst|
|Johannesburg, ZA||Vinay@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, November 2019|
Risk Score Summary
|Risk scores||Standard Insurance CO., INC|
|Country risk score||9.00|
|Sector risk score||6.50|
|Management and governance||0.00|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Standard Insurance Co., INC. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Standard Insurance Co., INC 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 Standard Insurance Co., INC and other reliable third parties to accord the credit ratings included:
- The audited financial results to 31 Dec 2018
- Four years of comparative audited numbers
- Unaudited interim results up to 30 June 2019
- Budgeted financial statements for 2019
- The current year reinsurance summary
- Other related documents.