Johannesburg, 12 March 2019 — Global Credit Ratings has today affirmed the national scale claims paying ability rating assigned to Compass Insurance Company Limited of AA-(ZA), with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has affirmed Compass Insurance Company Limited’s (“Compass Insure”) credit rating based on the following key factors:
Compass Insure’s liquidity is viewed to be very strong and a key rating strength. Liquidity metrics (on a conservative basis) registered within a very strong range in FY18, with cash coverage of net technical liabilities equating to 6.7x (FY17: 4.5x), and coverage of average monthly claims registering at 104 months (FY17: 44 months). GCR expects liquidity metrics to remain very strong over the rating horizon, given the conservative investment strategy and capacity for strong internal cash flow generation.
The insurer’s earnings capacity has strengthened over the bulk of the review period, supported by improvements in gross underwriting profitability (supplemented by reinsurance commission receipts) and robust realised investment income. Accordingly, the operating margin equated to 74% in FY18 (review period average: 46%). Despite sensitivity to weather related claims, GCR expects cross cycle net profitability to be sustained, given contained aggregate attritional claims experience and a consistent stream of investment income.
A further strengthening in net profitability supported sound internal capital generation, with capital accumulation being sufficient to cater for the level of underwriting and market risk carried by the insurer. Risk adjusted capitalisation is expected to be maintained at adequate to strong levels going forward, based on management’s targeted Solvency Capital Requirement (“SCR”) coverage range under Solvency Assessment and Management (“SAM”) parameters. Capital adequacy is further supported by exposure to strong reinsurance counterparties and conservative risk and event net deductibles.
The insurer’s market share remains limited, at around 1% of overall industry gross premiums. Note is, however, taken of the strong growth in continuing lines of business over the recent three year-cycle, which together with the launch of new technology driven products, could support a strengthening in the company’s competitive profile over the medium to longer term. Furthermore, the rating considers the relatively contained product risk associated with continuing lines of business.
The insurer’s rating is supported by its strategic importance to Hannover Reinsurance Group Africa (Pty) Limited (“Hannover Re Group Africa”; “the group”), given the strategic integration and alignment with group risk and capital management frameworks.
Positive rating movement could follow a strengthening in competitive positioning, together with a sustained strengthening in earnings capacity over the medium term. This would need to be supported by the maintenance of credit protection metrics at current levels. In contrast, a severe weakening in risk adjusted capitalisation or a persistent deterioration in earnings capacity could weaken the insurer’s standalone credit profile. Furthermore, a reassessment of the insurer’s strategic importance to Hannover Re Group Africa could prompt negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2004)|
|Claims paying ability: A(ZA)|
|Last rating (March 2018)|
|Claims paying ability: AA-(ZA)|
|Primary Analyst||Committee Chairperson|
|Sylvia Mhlanga||Godfrey Chingono|
|Credit Analyst||Deputy Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated May 2018
RSA Short Term Insurance Bulletins, 2001-2018
Compass rating reports, 2004 – 2018
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; 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.
The information received from Compass Insurance Company Limited and other reliable third parties to accord the credit rating included:
- Draft financial statements to 31 December 2018
- Four years of comparative audited financial statements to 31 December
- Budgeted financial results to 31 December 2019
- Statutory returns to 31 December 2018
- The current year reinsurance cover notes
- Other relevant company specific information
The rating above was solicited by, or on behalf of, the rated entity, 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
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Earned Premium||That part of the premium applicable to the expired part of the policy period.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|Loss||The happening of the event for which insurance pays.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|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.|
|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.|
|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 more detailed glossary of terms, please click here.
GCR affirms Compass Insurance Company Limited’s rating of AA-(ZA); Outlook Stable