Johannesburg, 09 April 2021 – GCR Ratings (“GCR”) has affirmed Compass Insurance Company Limited’s (“Compass Insure”) national scale financial strength rating of AA(ZA), with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Compass Insurance Company Limited||Financial strength||National||AA(ZA)||Stable Outlook|
Compass Insure’s rating affirmation reflects the resilience of its credit profile, supported by a strong financial profile, despite a strained operating environment. This is complemented by implicit group support from Compass Insure’s parent, Hannover Re Africa Limited, noting a high level of integration into the parent’s business model.
Compass Insure’s strong liquidity remained a key rating strength in the face of COVID-19 pandemic pressures. The factor’s assessment is supported by strong cash generation from operations, competitive operating cost management, as well as a good claims experience. In this regard, liquidity metrics remained resilient as evidenced by stressed financial asset coverage of net technical liabilities of 7.0x (FY19: 8.3x) and operational cash coverage of 30 months at FY20 (FY19: 54 months). Going forward, there is likelihood of a slight moderation in liquidity metrics from lower investment income, albeit with overall liquidity expected to register within a strong range.
Risk adjusted capitalisation registered within a strong range over the review period, supported by well contained exposures to insurance and market risks. In addition, Compass Insure managed to register improved internal capital generation in FY20, despite earnings risk posed by the COVID-19 pandemic. As such, the regulatory Solvency Capital Requirement (“SCR”) coverage registered at a higher 1.5x at FY20 (FY19: 1.4x). Going forward, the regulatory SCR coverage is expected to be maintained at a rating appropriate level, guided by the targeted range of 1.2x to 1.5x, supported by contained dividend distributions.
Despite exposure to COVID-19 associated risks and sensitivity to weather related claims, Compass Insure’s earnings remained sound, supported by healthy underwriting profitability and investment income. Underwriting profitability is bolstered by careful selection and onboarding of UMAs and strong reinsurance protection. Investment income was fairly stable regardless of lowering interest rates, supported by dividends from Compass Insure’s subsidiary. Going forward, GCR expects cross cycle net profitability to be sustained, given contained aggregate attritional claims experience and a consistent stream of investment income.
Compass Insure’s business profile is viewed as limited, reflecting low gross premium market share, a limited net revenue base and high product concentration to the property line of business. However, strong growth in ancillary lines of business recorded over the review period, together with the launch of new technology driven products positively impacted Compass Insure’s competitive position. Furthermore, the insurer’s competitive position is viewed in light of the large portion of captive revenue, as well as the well-diversified spread of risk premiums across UMAs.
Compass Insure’s rating derives upliftment from implied parental support from Hannover Reinsurance Group Africa (Pty) Limited, given its strategic integration and alignment with group risk and capital management frameworks.
The stable outlook reflects expectations that earnings will be maintained within a healthy range, while capitalisation is likely to be maintained above 1.3x, with steady earnings balancing dividend extraction. Liquidity is expected to remain very strong, supported by the conservative asset allocation. On the other hand, the business profile is likely to remain restrained over the outlook horizon owing to limited geographic and net premium diversification.
Positive rating action may stem from a strengthening in the business profile while all other credit protection metrics remain within strong ranges. Conversely, downward rating pressure may arise from prolonged earnings strain translating into a weakening of the overall credit profile.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||Sylviam@GCRratings.com||+27 11 784 1771|
|Committee chair||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Insurance Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, March 2021|
|GCR Insurance Sector Risk Scores, February 2021|
Compass Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Financial Strength||Initial*||National||A(ZA)||Stable||September 2004|
*Formerly claims paying ability.
Risk score summary
|Rating components and factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||8.00|
|Management and governance||0.00|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Gearing||Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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.|
|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.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|Technical Liabilities||The sum of Net UPR and Net OCR IBNR.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
|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.|
|Upstream||A term referring to the exploration and extraction of a commodity, in contrast with the downstream manufacturing and processing.|
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to the rated entity. 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. The rated entity participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from the rated entity and other reliable third parties to accord the credit rating included:
- Draft financial statements to 31 December 2020;
- Four years of comparative audited financial statements to 31 December;
- Budgeted financial statements to 31 December 2021;
- Current year reinsurance cover notes; and
- Other relevant information