RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings on Mainstream Re based on the following key criteria:
The ratings take cognisance of the fact that Mainstream Re is 1 of only 2 locally registered reinsurers, having well established relationships with local primary insurance players, and a close-to-market status, bolstering its market profile. This notwithstanding, its scale remains limited, with the reinsurer accepting about 7% of total F12 industry cessions. The reinsurer needs to leverage on its core advantages to successfully execute its growth strategy (enhancing economies of scale) in light of competition from existing and new entrants into the domestic market. Cognisance was also taken of Mainstream Re’s consistent underwriting profitability over the review period. However, cedants concentration remains high, with the 5 largest clients comprising 64% of the gross book, and the largest representing 20%.
Mainstream Re is well capitalised. The international solvency margin has been maintained above 100% over the review period, solidified by steady levels of internally generated capital. However, the large outstanding premium debtors (62% of capital, and 59% of GWP), albeit indicated as all outstanding for less than 150 days, represents significant capital risk. The limited scale of the investment portfolio, representing a low investment-to-asset ratio of 18%, which is also well below the 55% regulatory requirement, is a constraining factor to the reinsurer’s rating. This is exacerbated by the slow conversion of generated premiums into cash as evidenced by the noted large outstanding premiums debtors. Enhanced collection of outstanding premiums debtors is deemed critical to improving the reinsurer’s cash flow efficiencies, investment portfolio and liquidity. In this regards, the reinsurer displays low liquidity metrics, with the claims cash coverage ratio declining further to a review period low of 5 months and a low 0.3x technical liabilities cash coverage, which is far below GCR’s comfort level of 1x.
The international scale rating was constrained by Ghana’s sovereign rating of B+, given that the bulk of the reinsurer’s assets are domiciled in Ghana.
Upward movement on the rating or outlook could develop with a demonstrated, enhanced market position while maintaining a profitable underwriting track record. This must be accompanied by risk appropriate solvency levels, a stringent capital management policy and a prudent investment profile. A reduction in premium debtor balances would also be favorably viewed. A downgrade may arise on the back of a sustained deterioration in the operating performance, a lowering of the solvency margin below GCR’s comfort level for this rating on a sustained basis, and/or a weakening in liquidity metrics.
NATIONAL SCALE RATINGS HISTORY | INTERNATIONAL SCALE RATINGS HISTORY |
Initial rating (Nov/2008) | Initial rating (Nov/2008) |
Claims paying ability: A-(GH) | Claims paying ability: B |
Outlook: Stable | Outlook: Stable |
Last rating (Oct/2012) | Last rating (Oct/2012) |
Claims paying ability: A-(GH) | Claims paying ability: B |
Outlook: Stable | Outlook: Stable |
ANALYTICAL CONTACTS | |
Primary Analyst | |
Godfrey Waweru | |
Analyst | |
+27 11 784 1771 | |
waweru@globalratings.net | |
Committee Chairperson | |
Marc Chadwick | |
Regional Sector Head: Insurance | |
+27 11 784 1771 | |
chadwick@globalratings.net | |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Criteria for Rating Short Term Insurance and Reinsurance Companies
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
RATING LIMITATIONS AND DISCLAIMERS
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity.
Mainstream Reinsurance 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 ratings have been disclosed to Mainstream Reinsurance Company Limited with no contestation of the rating.
The information received from Mainstream Reinsurance Company Limited and other reliable third parties to accord the credit ratings included 2012 audited annual financial statements (plus four years of comparative numbers), full year detailed budgeted financial statements, the unaudited management accounts to 31 March 2013, the current year retrocession cover notes, aged debtors provisioning policy document, reserving methodologies, capital management policy.