Johannesburg, 18 March 2016 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Compass Insurance Company Limited to AA-(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:
The upgrade follows the successful bedding down of operational systems and processes, which allow for more efficient exchange of information and data, while simultaneously strengthening risk management and analytical capabilities. This provides the insurer with a solid platform upon which to grow the business profitably. Furthermore, the selective streamlining of the underwriting management agency (“UMA”) base, favourable attritional claims experience across most core portfolios, together with a continued focus on cost containment, is expected to contribute towards improved cross cycle underwriting profitability. Cash generation and earnings capacity are supplemented by realised investment income.
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. Nominal and risk adjusted capital levels are expected to be maintained at adequate to strong levels, given the alignment of capital management with the international group’s Solvency II framework. Furthermore, the rating benefits from the strong reinsurance counterparties and reasonably conservative risk and event net deductibles.
Compass’s competitive positioning is viewed to be limited, with a 1% share of industry gross premiums. Cognisance is, however, taken of the diversified spread of risk premiums across UMAs and lines of business.
The insurer’s rating is supported by its strategic importance to the Hannover Reinsurance Group Africa (Pty) Limited (“Hannover Re Group Africa”), as well as a high level of strategic integration and alignment with the group risk and capital management framework.
A strengthening in competitive positioning, together with continued enhancement of earnings capacity, could translate into positive rating movement over the medium term. 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 negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2004)|
|Claims paying ability: A(ZA)|
|Last rating (July 2015)|
|Claims paying ability: A+(ZA)|
|Primary Analyst||Committee Chairperson|
|Susan Hawthorne||Marc Chadwick|
|Senior Credit Analyst||Sector Head: Insurance Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2015
Compass rating reports, 2004 – 2015
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.|
|Capacity||The largest amount of insurance available from a company. In a broader sense, it can refer to the largest amount of insurance available in the marketplace.|
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|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.|
|Deductible||The portion of an insured loss to be borne by the insured before he is entitled to recovery from the insurer.|
|Financial Flexibility||The company’s ability to access additional sources of capital funding.|
|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.|
|Investment Income||The income generated by a company’s portfolio of investments.|
|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.|
|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.|
|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|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Stop Loss||Any provision in a policy designed to cut off an insurer’s losses at a given point.|
|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 ratings included:
- The latest audited financial statements to 31 December 2015
- Four years of comparative financial statements to 31 December
- Full year budgeted financial statements to 31 December 2016
- Quantitative and qualitative statutory returns to 31 December 2015
- Reinsurance cover notes for the 2016 treaties
- Other relevant documents
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.
GCR Upgrades Compass Insurance Company Limited’s rating to AA-(ZA); Outlook Stable