Johannesburg, 30 June 2021 – GCR Ratings (“GCR”) has affirmed Mainstream Reinsurance Company Limited’s (“Mainstream Re”) international scale financial strength rating of B-, and simultaneously affirmed the national scale financial strength rating of AA-(GH). Both ratings have been maintained on Stable Outlook.
|Rated entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Mainstream Reinsurance Company Limited||Financial strength||International||B-||Stable Outlook|
|Financial strength||National||AA-(GH)||Stable Outlook|
Mainstream Re’s national scale financial strength rating is underpinned by robust risk adjusted capitalisation and liquidity, consistent with high regulatory prudence in the Ghanaian insurance market. In particular, the 213% increase in minimum capital requirements for reinsurers to GHS125m by January 2022 is expected to increase redundancy in the financial profile over the short term, given advanced efforts to raise capital. Earnings capacity is moderately strong, buoyed by the reinsurer’s competitive operating model, with the aforementioned capital raise expected to, at a minimum, reduce downside risks. These credit advantages are partially offset by a limited business profile, albeit with the factor’s assessment likely to improve over the medium to longer term as capital is efficiently deployed. The international scale rating is suppressed by Ghana’s high risk operating environment on a global scale, reflecting low gross domestic product (“GDP”) per capita and relative fiscal and external challenges, while strong GDP growth potential and institutional strengths are modest positives.
Risk adjusted capitalisation continued to measure within a very strong range, with relatively sizeable capital catering well for the contained, but growing risk base, and limited exposure to market risk. Accordingly, the GCR capital adequacy ratio (“CAR”) persistently measured above 3x over the review period, while the statutory CAR remained well above the regulatory minimum of 150% over the same period. Concomitantly, liquidity metrics have been sustained at very high levels, with stressed financial assets coverage of net technical liabilities increasing to 6.8x (FY19: 4.9x) at FY20, while operational cash coverage registered at 19 months (FY19: 21 months). Note is however taken of ongoing negation of liquidity strength from risks stemming from limited banking counterparty diversification, giving rise to single counterparty concentration above prudent levels.
Earnings capacity is sound, with moderately strong underwriting profitability supplemented by sound investment income. Underwriting profitability is underpinned by a well contained claims experience (net incurred loss ratio averaging below 40% over the review period) and an increasingly competitive operating expense ratio, which gradually reduced to 21% in FY20, from 24.6% at the start of the review period. In this respect, the reinsurer’s underwriting margin equated to a four-year high of 11% in FY20 (FY19: 8%), while operating margins remained within the highest range (FY20: 25%; FY19: 29%) due to a well returning investment portfolio. Earnings are therefore expected to retain the current assessment over the outlook horizon, albeit likely to improve over the medium term as opportunities for further scale efficiencies become realisable, particularly if the current quality of the risk portfolio is not impacted by growth into less profitable segments.
The business profile is limited, given low market share and limited premium diversification. While the reinsurer benefits from local cessions as well as close to market presence, premium levels in absolute terms are viewed to be comparatively constrained relative to other local and regional players operating in the same market. This is compounded by limited premium diversification, given significant premium concentration to the primary market. Note is made of strong gross premium growth, which could accelerate and enhance the business profile over the medium term. That said, management and governance is viewed as a risk that could constrain the credit profile over the outlook period as the reinsurer’s market status develops. In this respect, ratings progression is likely to be restrained by the absence of commensurate governance measures, given our negative view on individual and family control, currently at around 90% shareholding. Furthermore, the major shareholder is the chairperson of the board, with one other significant shareholder participating on the board, limiting our view of board independence.
Risk adjusted capitalisation and liquidity are expected to remain at strengthened levels over the outlook horizon. In this regard, the GCR CAR is likely to remain above 3x while liquidity and operational cash coverage ratios could remain above 2x and 12 months respectively. Premium growth may be suppressed by intermittent surges in COVID-19 related risks, albeit likely to remain in the double-digit range. This view is premised on possible premium growth support from our annual inflation projections of around 10% and potential for a substantial increase in underwriting capacity if the planned capital injection is successful. As such, GCR has factored in risks to the quality of the gross book, which could limit underwriting margin progression. Furthermore, while progress in executing the capitalisation plan is viewed positively, capitalisation and liquidity assessments are likely to improve if the reinsurer addresses ongoing concerns on banking counterparty concentration and strengthens capital management, respectively. Overall, management and governance concerns are also likely to constrain the ratings as the credit profile develops.
Positive rating action may stem from sustained improvements in the business profile and earnings capacity. This may need to be supported by the implementation of prudent banking counterparty risk management and resolution of corporate governance concerns. Conversely, downward rating pressure may arise from a material weakening in earnings capacity, or negative sensitivity of the credit profile to regulatory risk.
|Primary analyst||Sylvia Mhlanga||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||Sylviam@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Godfrey Chingono||Deputy Sector Head: Insurance Ratings|
|Johannesburg, ZA||GodfreyC@GCRratings.com||+27 11 784 1771|
|Committee chair||Tichaona Nyakudya||Senior Analyst: Insurance Ratings|
|Johannesburg, ZA||TichaonaN@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, June 2021|
|GCR Insurance Sector Risk Scores, April 2021|
Mainstream Reinsurance Company Limited
Risk score summary
|Rating components & factors||Risk score|
|Country risk score||3.50|
|Sector risk score||4.25|
|Management and governance||0.00|
|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.|
|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. The reinsured may be referred to as the Original or Primary Insurer, or Direct Writing Company, or the Ceding Company.|
|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.|
|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.|
|Statutory||Required by or having to do with law or statute.|
|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 ratings are based solely on the merits of rated entities, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to the rated entity. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
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 entity and other reliable third parties to accord the credit ratings included:
- Draft financial results as at 31 December 2020;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2021;
- Reinsurance cover notes for 2020; and
- Other relevant documents.