Announcements Insurance Rating Alerts

GCR affirms Compass Insure’s national scale financial strength rating of AA(ZA); Outlook Stable

Rating Action

Johannesburg, 22 July 2020 – 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

The rating action follows a reduction in the South African country and insurance sector risk assessments.

The South African country risk score was lowered to 7.0 from 7.5 previously, in a market alert released on the 27th May 2020. Click here to access the link. On 4th June 2020, the South African Insurance sector risk score was also lowered to 8.0 from 8.75 previously. Click here to access link.

Combined, the above country and sector risk scores comprise the operating environment score, which is a key input into GCR’s ratings.

Rating Rationale

The national scale financial strength rating for Compass Insure reflects a strong financial profile, which is complemented by implicit group support from its parent, Hannover Re Africa Limited, noting a high level of integration into the parent’s business model, albeit partially offset by a limited business profile.

Compass Insure’s earnings are viewed to be healthy with the return on revenue registering at 25% for the period ending June 2020. Despite elevated exposure to high severity risks, GCR expects earnings to be resilient, supported by investment income and strong reinsurance protection. On the other hand, liquidity remained very strong in the midst of COVID-19 pandemic associated risks, supported by strong cash generation from operations, due to competitive operating cost management, as well as a favourable claims experience. Going forward, liquidity metrics are expected to remain within a very strong range, given a conservative investment strategy.

Capitalisation was assessed within a strong range, with well contained underwriting and market risk exposures supporting healthy risk adjusted capitalisation. Although note is taken of the potential adverse impact of the COVID-19 pandemic on earnings, risk adjusted capitalisation is expected to be maintained at rating adequate levels, with regulatory Solvency Capital Requirement (“SCR”) coverage projected above 1.2x.

The rating is constrained by the entity’s limited business profile, reflecting a gross premium market share of approximately 1.1%, 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.

Outlook Statement

The Stable Outlook reflects expectations of the financial profile to remain within rating sufficient levels, despite a slight moderation as a result of COVID-19 pandemic associated risks in FY20. However, GCR expects the financial profile to revert to the historical range in FY21. Underwriting profitability and investment income may moderate due to an increase in claims (in the worst case scenario) and softening interest rates respectively, although a modest impact is expected on through-the-cycle earnings. Capital is likely to be affected by lower retained earnings in FY20, albeit balanced by simultaneous reduction in insurance risk capital requirements, underpinning GCR expectations for regulatory SCR to be maintained above 1.2x.

Rating triggers

Positive rating action may stem from a strengthening in risk adjusted capitalisation while all other credit protection metrics remain within strong ranges. Conversely, downward rating pressure may arise from prolonged earnings strain and/or a weakening in liquidity below expectations.

Analytical Contacts

Primary analyst Sylvia Mhlanga Senior Analyst: Insurance
Johannesburg, ZA Sylviam@GCRratings.com +27 11 784 1771
Committee chair Godfrey Chingono Deputy Sector Head: Insurance
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, May 2020
GCR Insurance Sector Risk Scores, July 2020

Ratings History

Compass Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Financial Strength Initial National A(ZA) Stable September 2004
Last National AA(ZA) Stable March 2020

Risk Score Summary

Rating Components and Factors Risk score
Operating environment 15.00
Country risk score 7.00
Sector risk score 8.00
Business profile (2.75)
Competitive position (1.75)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 2.50
Earnings 0.50
Capitalisation 0.50
Liquidity 1.50
Comparative profile 2.00
Group support 2.00
Government support 0.00
Peer analysis 0.00
Total Score 16.75

Glossary

Premium The price of insurance protection for a specified risk for a specified period of time.
Primary Market The part of the capital markets that deals with the issuance of new securities.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
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.

SALIENT POINTS OF ACCORDED RATINGS

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 2019;
  • Four years of comparative audited financial statements to 31 December;
  • Budgeted financial results to 31 December 2020;
  • Management accounts to 30 June 2020;
  • The current year reinsurance cover notes; and
  • Other relevant information
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