Johannesburg, 17 March 2016 — Global Credit Ratings has today affirmed Tristar Insurance Company Limited’s national scale claims paying ability rating of BB-(ZW). In addition, the rating has been maintained on ‘Rating Watch’. The rating expires at the end of June 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Tristar Insurance Company Limited (“Tristar”) based on the following key criteria:
Tristar’s rating has been maintained on Rating Watch. This reflects the potential negative rating impact that adverse performance may have on Tristar’s capital relative to minimum regulatory requirements. This view is premised on the potential for retained losses to persist over the short term. Profitability challenges pertain to volumes (generating sufficient revenue in targeted lines to manage the cost ratio), claims (achieving a material reduction in the net incurred loss ratio relative to historical and market averages), and potential financial market losses. Given that the insurer’s capital equated to the minimum capital requirement of USD2.5m as at FYE15, any capital erosion reduces shareholders’ funds below the regulatory minimum requirement.
Tristar’s market share has contracted over the past three years, lowering to 2.1% in FY15 (FY14: 2.9%; FY13: 3.4%; FY12: 4.6%). This negative growth trend is viewed to have lowered Tristar’s competitive strength. Going forward, the insurer’s growth strategy centres on the uptake of motor business, with the higher-retained nature thereof underpinning a material 38% NPE growth expectation in FY16. The attainment of this very high and targeted growth expectation is viewed to be challenging however, given competitive dynamics.
Earnings capacity is viewed to be limited, and the execution risk associated with the turnaround in performance going forward is viewed to be high. In this regard, the historical reduction in revenue has limited the scale benefits required to achieve sustained profitability, underpinning large underwriting deficits throughout the review period. More recently, earnings capacity has also been negatively impacted by an elevated claims ratio, large bad debt write-offs, and continued unrealised investment losses on the listed equity portfolio.
Exposure to listed equities is considered high, corresponding to 50% of FYE15 capital (FYE14: 124%). This is compounded by the concentrated nature of the single counter exposure (which registered USD0.6m in unrealised losses in 2015). Positively, the insurer plans to dispose of the listed equity portfolio during the course of 2016 (although potential challenges given prevailing market conditions are noted).
Capital adequacy strengthened in FY15, following the capital injection, coupled with the lower net premium base. In this regard, the international solvency margin rose materially to 147% at FYE15 (having averaged a very low 35% over the previous three years). Going forward, GCR views the insurer’s capital base to continue to bear exposure to bottom line losses. Management has communicated the shareholders’ intention to inject an additional USD1.6m at FYE16 to support capital. This action may serve to alleviate potential net losses over the short term.
Supported by the capital injection, liquidity metrics improved materially as at FYE15. In this regard, net technical provision coverage improved to a high 2.5x cover at FYE15 (FY1E14: 0.3x) and claims cash coverage improved to 27 months (FYE14: 4 months). However, cognisance is taken of the nature of liquid assets held (Treasury bills), given the liquidity constraints in the operating environment. The insurer’s cash generation capacity over the short term is aligned to the success of the profit turnaround strategy (with cash flows from operations being suppressed over the past five years), although the potential additional capital injection at FYE16 may bolster the insurer’s liquidity position.
The Rating Watch reflects potential for negative rating action should budgeted profit targets not be met, causing continued capital erosion below the minimum regulatory capital requirement. A view that earnings capacity cannot be sustainably improved over a medium term outlook, as well as a weakening in liquidity levels, could also result in negative rating movement. Conversely, upward movement of the rating could develop over the medium term should sustainable earnings capacity improve, contributing to the preservation and generation of capital. This would need to be supported by measures to de-risk the insurer’s investment portfolio to alleviate capital pressures, and support liquidity.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2010)||Last rating (July 2015)|
|Claims paying ability: BBB+(ZW)||Claims paying ability: BB-(ZW)|
|Rating watch: Yes||Rating watch: Yes|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Fidelis Masheka|
|Sector Head: Insurance Ratings||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2015
Tristar rating reports, 2010-2015
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. 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.
Tristar Insurance 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 Tristar Insurance Company Limited with no contestation of the rating.
The information received from Tristar Insurance Company Limited and other reliable third parties to accord the credit rating included:
- The 2015 unaudited financial statements
- 4 years of comparative audited numbers
- Budgeted financial statements for 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||The items on the balance sheet of the insurer which show the book value of property owned. Under regulations, not all property or other resources may be admitted in the statement of the insurer. This gives rise to the term ‘non-admitted assets.’|
|Balance Sheet||An accounting term which refers to a listing of the assets, liabilities, and surplus of a company or individual as of a specific date.|
|Capacity||The largest amount of insurance or reinsurance available from a company. In a broader sense, it can refer to the largest amount of insurance or reinsurance available in the marketplace.|
|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 to agents and brokers.|
|Insurer||The party to the insurance contract whom promises to pay losses or benefits. Also, any corporation engaged primarily in the business of furnishing insurance to the public.|
|Interest||Money paid for the use of money.|
|Liquidity||The ability of an insurer to convert its assets into cash to pay claims if necessary.|
|Loss Ratio||The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance also called the policy contract or the contract.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|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.|
|Reserve||An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders.|
|Retention||The net amount of risk the ceding company keeps for its own account|
|Risk||Uncertainty as to the outcome of an event when two or more possibilities exist.|
|Solvency||With regard to insurers, having sufficient assets (capital, surplus, reserves) and being able to satisfy financial requirements (investments, annual reports, examinations) to be eligible to transact insurance business and meet liabilities.|
|Statutory||Required by or having to do with law or statute.|
|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.|
For a detailed glossary of terms please click here
GCR affirms Tristar Insurance Company Limited’s rating of BB-(ZW); Rating Watch.