The rating upgrade reflects the changes made to the board composition with the aim of complying with the regulatory requirements. Furthermore, the maintenance of the insurer’s intermediate competitive position resulted in a slightly improved business profile assessment. Goldstar exhibits a strong financial profile, characterised by very strong risk adjusted capitalisation and liquidity, while the earnings capacity assessment factors in sustained underwriting profitability and continued sound net earnings.
Goldstar’s robust capitalisation is a function of strong capital generation from operations and a low risk retention operating model. Furthermore, the insurer benefits from a conservative investment portfolio and relatively limited credit exposures. As such, Goldstar has built a level of capital redundancy in the capital base, with the GCR capital adequacy ratio measuring at a high 4.8x at December 2022 (December 2021: 4.5x). We expect capitalisation to be maintained at the current level, supported by strong earnings and limited dividend extraction.
The insurer’s strong earnings are supported by low deductibles on a quality gross book, generating high net commission recoveries plus a very competitive loss ratio. In this regard, the net incurred loss ratio measured at 29% in 2022 compared to 55% in 2021. This was a result of a clean-up in the accident book among other claim management initiatives. The commission ratio was negative 29% in 2022 compared to negative 45% in 2021. As such, the three-year combined ratio equated to 70% (2022: 69%). Investment income supported net margins throughout the review period, with the three-year return on revenue averaging 36%. Although we note volatility in earnings, we view the insurer’s demonstrated track record of underwriting profitability as indicative of earnings capacity going forward.
Liquidity is assessed within a very strong range, supported by conservative asset allocation and low insurance risk retention. In this respect, the insurer’s liquidity coverage registered at 2.5x at December 2022 (December 2021: 2.6x). We expect liquidity metrics to remain within a very strong range over the rating horizon, underpinned by strong operating cash flow generation and sustained conservative asset allocation.
Goldstar’s competitive position measures within an intermediate range, reflecting the insurer’s focus on niche markets and non-participation on select risks. The insurer’s market position is supported by long standing relationships with brokers and clients, giving access to diverse market mandates within the predominant corporate segment. In tandem with limited gross premium scale, premium diversification is expected to remain at very low levels, with the uptake of small to medium sized risks in the medium to long term expected to increase the level of policyholder diversification.
Our view on management and governance changed in accordance with the reforms made to the insurer’s board composition, which now includes a majority of independent members and is in compliance with the regulatory requirement. We expect Goldstar to fully comply with the remaining requirements in the next 6 to 12 months
The Stable Outlook reflects our view that the financial profile will be maintained within the currents range exhibiting significant headroom within the GCR CAR and liquidity ratio metrics which are expected to measure above 3x and 2x respectively over the medium term. Although management and governance may improve with compliance with board committees’ regulatory requirements, the business profile is expected to remain within the same range.