Johannesburg, 21 July 2015 — Global Credit Ratings has today downgraded the national scale claims paying ability rating assigned to Tristar Insurance Company Limited to BB-(ZW), with the rating placed on ‘Rating Watch’. The rating is valid until December 2015.
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:
The downgrade of the rating reflects the insurer’s sustained deterioration in balance sheet strength, largely due to persistent retained losses. In this regard, Tristar’s capital base has fallen below the minimum regulatory requirements. The ‘Rating Watch’ is premised on the ability of the insurer to sufficiently recapitalise in order to meet regulatory requirements.
Tristar’s capital base is highly exposed to listed equities, representing 124% of shareholders’ funds at FYE14 (FYE13: 112%). In view of the capital base falling below minimum regulatory requirements, the insurer does not have the capacity to absorb further deterioration in asset value and/or retained losses. In this regard, market risk exposure represents a very high risk to capital. Accordingly, the insurer’s international solvency margin equated to a low 33% as at May F15 (FYE14: 43%; FYE13: 25%).
Tristar’s liquidity is viewed to be very low relative to technical provisions. In this regard, provision coverage remained constrained at 0.3x cover at FYE14. The low coverage serves as a notable rating weakness. In view of the weak cash flow generation and limited derisking of the balance sheet, liquidity constraints are expected to persist going forward.
Tristar has displayed a very weak level of underwriting profitability over the review period, with the volatility of the underwriting result measuring at high levels. This stems from Tristar’s above average expense ratio relative to peers, which represents a current disadvantage in terms of generating underwriting margins.
Tristar’s decreasing market penetration currently serves as a constraint to the rating. In order to address volume losses, management is deploying a revised growth strategy aimed at the scaling up of operations over the medium term. In this regard, GCR favourably views re-engagement with the broker market. Management expects the move to deliver a deeper market penetration, coupled with a source of underwriting profitability, over the medium term. The successful attainment of these objectives represents a key short term rating consideration.
Reinsurance arrangements are placed with counterparties with high to mid-level national scale ratings, containing the reinsurance counterparty risk at a relatively low level. GCR’s view of reserving sufficiency is positively impacted by the certification of reserve levels by a qualified actuary.
GCR views country risk factors to be elevated, and a systematic rating consideration applicable to insurers. Operational challenges are likely to persist given the uncertain socio-political outlook, severe liquidity strain, reduction in banking sector stability and weak macroeconomic fundamentals.
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. Conversely, GCR is likely to downgrade the rating should Tristar not sufficiently capitalise to meet regulatory requirements, as well as display increased potential for profit and cash generation over the medium term. Further loss of market share and weakening in liquidity metrics is also likely to result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2010)|
|Claims paying ability: BBB+(ZW)|
|Rating watch: Yes|
|Last rating (June 2014)|
|Claims paying ability: BB+(ZW)|
|Primary Analyst||Secondary Analyst|
|Marc Chadwick||Fidelis Masheka|
|Sector Head: Insurance Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2014
Tristar rating reports, 2010-2014
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 2014 audited financial statements
- 4 years of comparative audited numbers
- Unaudited interim results as per 31 May 2015
- Budgeted financial statements for 2015
- 2015 reinsurance cover notes
- Other related documents.
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.
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