Announcements Insurance Rating Alerts

GCR revises Mainstream Reinsurance Company Limited’s national scale financial strength rating to A+(GH) on criteria change; Outlook Stable

Rating Action

Johannesburg, 6th November 2019 – GCR Ratings (“GCR”) has revised Mainstream Reinsurance Company Limited’s (“Mainstream Re”) national scale financial strength (formerly claims ability) rating to A+(GH), with the outlook accorded as Stable. Furthermore, Mainstream Re’s international scale financial strength (formerly claims paying ability) rating has been affirmed at B-, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook/Watch
Mainstream Reinsurance Company Limited Financial strength National A+(GH) Stable Outlook
Financial strength International B- Stable outlook

GCR announced that it had released new criteria for rating insurance companies in May 2019. Consequently, the rating for Mainstream Re was placed ‘Under Criteria Observation’. GCR finalised the review for Mainstream Re under the released Criteria for Rating Insurance Companies, May 2019. As a result, the rating for Mainstream Re has been reviewed in line with the new methodology and subsequently removed from ‘Under Criteria Observation’.

Rating Rationale

The rating reflects very strong liquidity and risk adjusted capitalisation metrics as well as moderately strong earnings. These attributes are, however, partially diluted by a relatively limited business profile.

Mainstream Re’s capitalisation is viewed to be strong, with well contained underwriting and market risks supporting very strong risk adjusted capitalisation, although this is counterbalanced by the relatively small capital base in absolute terms (FY18: USD11.3m; FY17: USD10.7m). In GCR’s view, risk adjusted capitalisation is expected to continue to measure within a similar range, underpinned by sound internal capital generation and limited exposure to market risk. Mainstream Re’s comparatively strong liquidity profile is reflected through its stressed financial asset coverage of net technical liabilities measuring at 3.9x (FY17: 4.5x) while operational cash coverage registered at 22 months at FY18 (FY17: 28 months), being a function of a relatively sizeable and highly liquid investment portfolio.

Earnings capacity is considered to be sound, with strong investment income supporting moderate underwriting profitability. In this respect, the five year underwriting margin equated to 5% (FY18: 5%; FY17: 7%) while the five year net profitability ratio equated to 29% (FY18: 37%; FY17: 40%). Underwriting profitability has been supported by a well contained claims experience, a low cost base and enhanced scale efficiencies while net profitability has strengthened over the review period, with the large liquid asset balance viewed to support a sustainable stream of realised investment income. Earnings are expected to be sustained at strengthened levels over the rating horizon.

The business profile is limited, given low market share and weak 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 market. This is further intensified by limited premium diversification given significant concentration to the primary market, with 97% of FY18 premiums written locally.

Outlook Statement

The stable outlook reflects expectations of capital and liquidity strength to persist.

Rating triggers

Positive rating action may stem from sustained improvement in competitive position, with risk adjusted capitalisation, earnings and liquidity metrics maintained at strengthened levels. Conversely, downward rating pressure may arise from a sustained deterioration in operating performance and/or a weakening in credit protection metrics.

Analytical Contacts

Primary analyst Sylvia Mhlanga Insurance Analyst
Johannesburg, ZA Sylviam@GCRratings.com +27 11 784 1771
Committee chair Yvonne Mujuru Sector Head: Insurance Ratings
Johannesburg, ZA YMujuru@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 2019
GCR Insurance Sector Risk Scores, November 2019

Ratings History

Mainstream Re Insurance Company Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Claims paying ability Initial National A-(GH) Stable November 2008
Last A(GH) Stable August 2018
Claims paying ability Initial International B Stable November 2008
Last B- Stable August 2018

Risk Score Summary

Risk scores
Operating environment 8.00
Country risk score 3.75
Sector risk score 4.25
Business profile (2.25)
Competitive position (1.25)
Premium diversification (1.00)
Management and governance 0.00
Financial profile 3.00
Earnings 0.50
Capitalisation 1.50
Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 8.75

Glossary

Accident An unplanned event, unexpected and undesigned, which occurs suddenly and at a definite place.
Accounting A process of recording, summarising, and allocating all items of income and expense of the company and analysing, verifying and reporting the results.
Agency An insurance sales office which is directed by an agent, manager, independent agent, or company manager.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
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.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
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.
Capitalisation The provision of capital for a company, or the conversion of income or assets into capital.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its risks.
Captive Insurance Company A company owned solely or in large part by one or more non- insurance entities for the primary purpose of providing insurance coverage to the owner or owners.
Cash Funds that can be readily spent or used to meet current obligations.
Catastrophe An event, which causes a loss of extraordinary magnitude.
Claim A request for payment of a loss, which may come under the terms of an insurance contract.
Commission A certain percentage of premiums produced that is received or paid out as compensation by an insurer.
Contract An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the 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.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Experience A term used to describe the relationship, usually expressed as a percent or ratio, of premiums to claims for a plan, coverage, or benefits for a stated time period.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For an insurer, its exposure may also relate to the risk related to policies issued.
Facultative Facultative reinsurance means reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the “faculty” to accept or reject each risk offered.
Financial Flexibility The company’s ability to access additional sources of capital funding.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
Income Statement A summary of all the expenditure and income of a company over a set period.
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.
Interest Money paid for the use of money.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
Investment Income The income generated by a company’s portfolio of investments.
Investment Portfolio A collection of investments held by an individual investor or financial institution.
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.
Loss The happening of the event for which insurance pays.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Net Retention The amount of insurance that a ceding company keeps for its own account and does not reinsure.
Operational Risk The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.
Personal Lines Types of insurance, such as auto or home insurance, for individuals or families rather than for businesses or organisations.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
Policyholder The person in actual possession of an insurance policy.
Pool An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.
Preference Share Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.
Premium The price of insurance protection for a specified risk for a specified period of time.
Rating Horizon The rating outlook period
Reinstatement The resumption of coverage under a policy, which has lapsed.
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.

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 were based solely on the merits of rated entities, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Mainstream Reinsurance Company Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Mainstream Reinsurance Company Limited participated in the rating process via face-to-face 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 entities and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2018;
  • Four years of comparative audited financial statements to 31 December
  • Full year budgeted financial statements for 2019;
  • Unaudited interim results to 30 June 2019;
  • Reinsurance cover for 2019; and
  • Other relevant documents.


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