Johannesburg, 01 Jul 2014 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Tristar Insurance Company Limited of BB+(ZW) with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Tristar Insurance Company Limited (“Tristar”) based on the following key criteria:
Incorporated in 2002, Tristar is an 87% owned short term insurance subsidiary of First Mutual Holdings Limited (“FMHL”). FMHL is a financial services investment holding company, with subsidiaries spanning life assurance, short term insurance, property investment and actuarial consultancy. In turn, the National Social Security Authority (“NSSA”) is the majority shareholder of FMHL, with a 51% stake.
Despite efforts to achieve stability in its operating platform, both business volumes and profitability have continuously remained under pressure over the past four years, resulting in significant rating strain. In this regard, the rating has been placed on “Negative” outlook. Management has recently undergone an extensive analysis of its internal operations with a number of corrective measures to address the cumbersome delivery cost structure and inappropriate pricing implemented. Accordingly, the successful implementation of this, and Tristar’s ability to restore revenue streams and sustain overall profitability, will be a key rating driver over the near term. Notwithstanding repeated recapitalisations in view of sustained retained losses, Tristar’s capital adequacy remains weak. Whilst solvency strain is expected to persist in view of management’s robust growth stance, it is projected to be maintained above the 25% regulatory minimum requirement. Moreover, solvency pressure is exacerbated by a high degree of market risk associated with the recently increased exposure to listed equities (103% of 1Q F14 capital). This follows the US$0.7m capital injection by a way of a renounceable rights offer by FMHL in March 2014. The rating also reflects the stressed liquidity profile of the company, with cash coverage of technical liabilities reported at a low 0.4x.
The negative outlook reflects the very high level of execution risk inherent in management’s envisioned turnaround of operational performance, compounded by the strained competitive environment. In light of this, GCR is likely to downgrade the rating should Tristar not achieve the return to underwriting profitability in F14 as budgeted, as well as display increased potential for profit and cash generation over the medium term. A weakening in solvency and liquidity metrics is also likely to result in negative rating action. An upward movement of the rating could develop if, over the next few years, Tristar consistently improves net profitability, which contributes to the adequate build-up of capital. Measures to de-risk its investment portfolio to alleviate capital and liquidity pressures would also be required.
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NATIONAL SCALE RATINGS HISTORY
Initial rating (Oct/2010)
Claims paying ability: BBB+(ZW)
Rating Watch: Yes
Last rating (Sep/2013)
Claims paying ability: BB+(ZW)
Rating Watch: Yes
Sector Head: Insurance
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies (July 2013)
Tristar rating reports, 2010-2013
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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/s 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(s) included the 2013 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements for 2014, year to date management accounts to April 2014, the 2014 reinsurance cover notes, as well as other non-public statistical information specific to the entity.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms Tristar Insurance Company Limited’s rating of BB+(ZW); Outlook Negative.