Johannesburg, 31 July 2015 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Compass Insurance Company Limited of A+(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating to Compass Insurance Company Limited (“Compass”) based on the following key criteria:
Compass is a wholly owned subsidiary of Hannover Reinsurance Africa Limited (“Hannover Re Africa”), which is rated AAA(ZA) by GCR. Hannover Re Africa is 100% owned by Hannover Reinsurance Group Africa (Pty) Ltd, and the ultimate 100% holding company is Hannover Rück SE (“Hannover Rück”), which carries an international financial strength rating of AA-. GCR considers Compass to be strategically important to Hannover Re Africa, which is a key supporting factor to the insurer’s current rating.
Compass displays very strong liquidity levels and a low risk balance sheet, which is expected to continue to support the insurer’s standalone credit quality going forward. Risk adjusted capitalisation is expected to be maintained at adequate levels, while capital adequacy is further supported by the strong reinsurance counterparties and moderate risk and event retention levels.
Compass has registered a high degree of underwriting volatility over the review period, although note is taken of the turnaround in profitability for continuing lines of business, signalling a potential strengthening in earnings capacity and stability going forward.
The underwriting management agency (“UMA”) based business model is viewed to be exposed to a higher level of inherent risk, due to the outsourcing of certain key functions. Note is, however, taken of the investment in enhanced operational platforms, which allow for more efficient exchange of information and data, while simultaneously strengthening risk management and analytical capabilities.
Positive rating movement could follow a strengthening in earnings capacity, underpinned by sustained gross and net underwriting profitability in the continuing UMA portfolios. This is premised on maintenance of currently strong levels of balance sheet strength. In contrast, a severe and prolonged weakening in risk adjusted capitalisation and/or liquidity levels, or a reassessment of the insurer’s strategic importance to Hannover Re Group Africa, could prompt a negative rating adjustment.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2004)|
|Claims paying ability: A(ZA)|
|Last rating (July 2014)|
|Claims paying ability: A+(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Insurance Companies, updated July 2014
Compass rating reports, 2004-2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capitalisation||The provision of capital for a company, or the conversion of income or assets into capital.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its risks.|
|Claim||A request for payment of a loss, which may come under the terms of an insurance contract.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Interest||Money paid for the use of money.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquidity||The speed at which assets can be converted to cash. The ability of an insurer to convert its assets into cash to pay claims if necessary. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Loss||The happening of the event for which insurance pays.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|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.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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
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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Compass 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 Compass Insurance Company Limited with no contestation of the rating.
The information received from Compass Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Audited financial results to 31 December 2014
- Four prior years of comparative audited financial results
- Unaudited results to 30 June 2015
- Budgeted financial statements to 31 December 2015
- Statutory returns to 31 December 2014 and 31 March 2015
- The current year reinsurance cover notes
- Other company specific information
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.