Johannesburg, 18 August 2021 – GCR Ratings (“GCR”) has downgraded Star Assurance Company Limited’s (“Star”) national scale financial strength rating to A-(GH), from A(GH), with the Outlook accorded as Stable.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Star Assurance Company Limited||Financial strength||National||A-(GH)||Stable Outlook|
The rating downgrade follows the maintenance of downward pressure on Star’s credit profile following delays in investment property disposal, negatively impacting capitalisation and liquidity. In FY19, the underwriter converted significant high yielding deposits (with sister company, the failed UniSecurities Ghana Limited) into land banks. The insurer is selling part of the investment property portfolio, however, they have not been successful given the current economic situation.
Although the insurer’s capital base has been maintained at high levels over the review period (FY20: GHS280m; FY19: GHS243m), GCR notes a deterioration in asset quality resulting in capital concentration to risky assets over the past two years. Subsequent to the aforesaid conversion, market and concentration risk increased with investment property constituting 63% of capital at FY20 (FY19: 73%). Note is also taken of the significancy of an unlisted equity holding (55% of capital), bringing the total weight of risky assets to 115% of capital at FY20. Although risk adjusted capitalisation is viewed to be strong, it has moderated over the past two years relative to historical levels. As such, the GCR capital adequacy ratio (“CAR”) for Star registered at 1.9x at FY20 (FY18: 2.6x; FY19: 2.0x). Capitalisation is expected to be maintained within the same range over the rating horizon, with a material improvement in asset quality positively viewed.
Relative to historical levels, liquidity metrics maintained a downward trend at FY20, a result of increased exposure to investment property in FY19 (44% of total investments). As such, stressed financial assets coverage of net technical liabilities measured at 1.7x (FY19: 1.7x; FY18: 2.6x) while operational cash coverage registered at 8 months (FY19: 7 months; FY18: 22 months). Management is in the process of selling part of the investment property, however in our view, downside risks to asset disposal is viewed to be high given the current economic situation. A material reduction of this high-risk exposure and subsequent investment in more liquid assets may be positively considered in future factor assessment.
Earnings capacity is viewed to be moderate, impacted by poor underwriting profitability as a result of an elevated operating cost structure. Note is taken of review year improvements in the net incurred loss and operating expense ratios, registering at 39% and 47% (FY19: 44% and 50%) respectively. Accordingly, the underwriting margin improved to -5% in FY20 (FY19: -11%). Weak underwriting profitability was historically offset by strong investment returns. However, investment income has been significantly weaker over the past two years as a result of changes in the investment portfolio. In this respect, the investment portfolio yielded 3.3% in FY20 (FY19: 3%; FY16: 24%). Consequently, the return on revenue averaged -0.1% over the past two years, compared with an aggregate average of 22% registered during the first three years of the review period.
Star’s rating also takes into account the insurer’s intermediate business profile, underpinned by a healthy competitive position, somewhat limited premium diversification, and a negative assessment on management and governance. The insurer holds an approximate 8% share of domestic short term insurance premiums in FY20, supported by an established brand and a wide distribution network. Furthermore, gross earnings streams are viewed to be well diversified, with three business lines contributing materially to total gross premiums, while the net base mirrors the business mix, albeit heavily weighted towards the motor book.
Star Assurance is part of the HODA Holding group (“the Holdco”). In September 2020, through the consolidation of three of the Holdco’s insurance subsidiaries, Star Assurance Group Limited “(SAGL”) was formed. While we acknowledge efforts to improve transparency through the establishment of the SAGL, GCR will appreciate more insight into the operations of the wider group, encompassing other subsidiaries of the Holdco which are not part of the SAGL. GCR notes with concern, lack of transparency regarding the performance and exposures of the wider group, as well as the opaqueness of transactions between the Holdco and its various subsidiaries. In this regard, management and governance considerations are viewed negatively, acting as a constraint to the rating.
Risk adjusted capitalisation and liquidity are expected to remain at similar levels over the outlook horizon. In this regard, the GCR CAR is likely to register between 1.7x and 2.0x while liquidity ratio could remain above 1.5x. Underwriting profitability is expected to remain in the negative territory due to high operating costs while investment income suppression may be sustained, reflecting a reduction in earning assets. The business profile is likely to be maintained within a similar range over the medium term.
Upward rating action may stem from an improvement in the asset quality leading to a strengthening risk adjusted capitalisation, liquidity and bottom-line earnings. Furthermore, a sustainable turnaround in underwriting performance could be viewed positively. Conversely, the rating may be downgraded if the liquidity profile deteriorates further.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||Sylviam@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, July 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Star Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial strength||Initial*||National||A(GH)||Stable||September 2009|
*Formerly claims paying ability.
Risk score summary
|Rating components & factors||Risk scores|
|Country risk score||3.50|
|Sector risk score||4.25|
|Management and governance||(1.00)|
|Accident||An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.|
|Accounting||A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.|
|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 rated entities, 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 the rated entity. 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.
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 entities and other reliable third parties to accord the credit rating included:
- Draft 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 30 June 2021;
- Other relevant documents.