Johannesburg, 07 Oct 2013 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Tristar Insurance Company Limited of BB+(ZW); with the rating placed on Rating Watch. The rating(s) are valid until 3/2014.
Global Credit Ratings has accorded the above credit rating(s) on Tristar Insurance Company Limited based on the following key criteria:
Tristar Insurance Company Limited (“Tristar”) is a 100% owned short term insurance subsidiary of First Mutual Holdings Limited (“FMHL,” formerly Afre), and specialises in underwriting corporate risks. FMHL is a financial services investment holding company, with subsidiaries spanning life assurance and related products, short term insurance, property investment and actuarial consultancy. FMHL is in turn 85% owned by the National Social Security Authority (“NSSA”).
Capitalisation is viewed to be weak, with significant erosion stemming from a consistently weak operating performance. In this regard, and notwithstanding a US$1.2m cash injection from shareholders, sizeable losses cumulatively amounting to US$1.8m reduced shareholders interest to just US$1m by 1H F13. As such, international solvency declined to 37% in F12, falling further to 21% at 1H F13, and is projected to fall below the regulatory minimum by FYE13. Accordingly, Tristar’s rating has been placed on Rating Watch, as GCR will closely monitor the insurer’s performance, and given management’s undertaking to maintain the solvency margin above the 25% minimum threshold and to comply with the reviewed US$1.5m requirement by June 2014. Despite the unwinding of a US$1m loan to FMHL, the aforementioned losses have reduced cash significantly from interim period F12 highs. While liquidity metrics evidenced a strong improvement from the dire FYE11 position, further losses could significantly undermine liquidity. Prior capital support has, in GCR’s view, displayed shareholders’ commitment to the entity. However, until a notable turnaround in the insurer’s operating performance is demonstrated, GCR views the risk of potential for shareholder fatigue to exist. The majority of reinsurers are investment grade rated on a national scale. High per risk net retention (9% of 1H F13 capital), however, exposes Tristar to an accumulation of unrelated risks.
In view of the Rating Watch status, upward movement of the rating is deemed unlikely. Upward rating pressure could, however, develop over the medium term, on the back of consistent profitability, achieved through cost rationalisation measures and a refinement of the underwriting criteria. Negative rating action may emanate from persistent pressure on solvency due to capital erosion. In this regard, the insurer is expected to maintain solvency above the minimum requirement to maintain the rating. Note was also taken of the highly uncertain socio-political outlook, which is likely to exacerbate challenges within the operating climate, constraining capital inflows and economic growth. Should this deteriorate further, the rating ceiling of the insurance sector as a whole would likely be reviewed.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Oct/2010)
Claims paying ability: BBB+(ZW)
Rating Watch: Yes
Last rating (May/2012)
Claims paying ability: BB+(ZW)
|Primary Analyst||Secondary Analyst|
|Patricia Zvarayi||Damien Dube|
|Senior Analyst||Junior Analyst|
|+27 11 784 1771||+27 11 784 1771|
|Sector Head: Insurance|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s criteria For Rating Short Term Insurance and Reinsurance Companies.
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.
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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 included the 2012 audited annual financial statements (plus three years of comparative numbers, full year detailed budgeted financial statements, unaudited year to date management accounts to June 2013, the current year reinsurance cover notes, debtors provisioning policy document, risk framework, reserving methodologies, capital management policy.