Johannesburg, 07 September 2017 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Star Assurance Company Limited of A+(GH), with the outlook accorded as Stable. The rating is valid until August 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Star Assurance Company Limited (“Star”) based on the following key criteria:
Star reflects a very strong business profile. Strong premium growth in the transport portfolio resulted in the insurer deriving material premiums from four lines of business in FY16, resulting in a well-diversified earnings base. This, combined with very strong competitive positioning (being the third largest player in 2016), with a market share estimated at 12% in FY16, should uphold the insurer’s very strong business profile over the medium term.
The insurer’s risk adjusted capitalisation is viewed to be very strong, underpinned by well contained underwriting and market risk exposures. This has been sustained by a sound level of retained income and a full profit retention strategy. Resultantly, the insurer’s capital base measured at a higher GHS87m at FY16 (FY15: GHS67m). In this respect, Star’s international solvency margin equated to 115% at FY16 (FY15: 119%) and is projected to equate to 100% in FY17.
Star’s rating is supported by very strong liquidity metrics. This is a function of strong operating cash flows coupled with a very conservative asset allocation strategy, which limits exposure to risky assets. Consequently, the cash coverage of net technical liabilities and the claims cash coverage equated to 2.0x and 48 months at FY16 (FY15: 2.3x and 52 months) respectively. Despite the budgeted increase in property exposure (GHS13m planned investment) in FY17, the insurer’s key liquidity measures are expected to remain within a very strong range.
Earnings capacity is viewed to be intermediate, with weak underwriting profitability being offset by a large quantum of investment income. Underwriting profitability, having been negatively impacted by atypical expenses in the previous two years (bad debt write offs in FY14 and flood related claims in FY15), remained repressed in FY16, underpinned by limited scale efficiencies. This was exacerbated by the insurer’s loss ratio, which remained elevated at 45% in FY16 (FY15: 42%, FY14: 29%), further limiting margin headroom. As such, the insurer recorded a third consecutive underwriting loss of GHS11m in FY16 (FY15: -GHS6m), translating to a poor negative underwriting margin of 16% (FY15: -11%). In GCR’s view, Star’s earnings capacity is expected to remain pressured over the rating horizon, underpinned by limited scale efficiencies and an elevated loss ratio. The reinsurance programme reflects an intermediate aggregate level of counterparty strength, with the maximum net retention per risk and event equating to a well contained 1.7% of FY16 capital.
Positive rating action may stem from a sustained strengthening in earnings capacity and business profile. Conversely, negative rating action may follow further deterioration in earnings capacity, risk adjusted capitalisation and liquidity metrics.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (September 2009)|
|Claims paying ability: A(GH)|
|Last rating (August 2016)|
|Claims paying ability: A+(GH)|
|Primary Analyst||Secondary analyst|
|Marc Chadwick||Tichaona Nyakudya|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784 – 1771||(011) 784 – 1771|
|Sector Head: Insurance Ratings|
|(011) 784 – 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2017
Star Assurance Company Limited rating reports, 2009-2016
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/RATING-SCALES-DEFINITIONS. 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.
Star Assurance 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 Star Assurance Company Limited with no contestation of the rating.
The information received from Star Assurance Company Limited and other reliable third parties to accord the credit rating included:
- The audited annual financial statements to 31 December 2016
- 4 years of comparative financial statements to 31 December
- Budgeted financial statements to 31 December 2017
- Financial Condition Report at 31 December 2016
- Other related documents.
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
|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.|
|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.|
|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.|
|Execution Risk||The risk that a company’s business plans will not be successful when they are put into action.|
|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.|
|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.|
|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.|
|Operating Margin||Measures the efficiency of profit generation from investments and underwriting.|
|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.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here
GCR affirms Star Assurance Company Limited’s rating of A+(GH); Outlook Stable.