Johannesburg, 27 September 2016 — Global Credit Ratings has today upgraded the national scale claims paying ability rating assigned to Mainstream Reinsurance Company Limited to A(GH) from A-(GH), with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale claims paying ability rating at B-, with the outlook accorded as Stable. The ratings are valid until August 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Mainstream Reinsurance Company Limited (“Mainstream Re”) based on the following key criteria:
The upgrade of the national scale rating reflects the material strengthening in capitalisation, following capital injections amounting to GHS21m over the last two years. In this respect, the reinsurer’s consolidated capital base amounted to a higher GHS40m at 3Q F16 (FYE15: GHS34m; FYE14: GHS15m). As such, the short term business’ international solvency margin equated to a higher 264% at FYE15 (FYE14: 156%), reflective of very strong levels of risk adjusted capitalisation. Risk adjusted capitalisation is likely to remain within a highly elevated range over the rating horizon, underpinned by sound (and enhanced) internal capital generation, and comparatively low insurance and market risk exposures.
The reinsurer’s liquidity improved substantially to GHS23m at FYE15 (FYE14: GHS7m), supported by the capital injections (which were largely placed in liquid assets). As such, liquidity metrics improved substantially, with claims cash cover equating to a very high 84 months and cash coverage of net technical provisions registering at a very strong 2.3x at FYE15 (FYE14: 29 months and 1.3x). GCR expects the company’s liquidity metrics to remain within a strong range over the rating horizon, supported by conservative asset allocation.
The company’s underwriting earnings capacity is viewed to be moderately strong, supported by net incurred loss ratios remaining relatively well contained within a narrow range. In this regard, the reinsurer’s aggregate underwriting margin equated to 4% over the review period. Furthermore, the large liquid balance provides the reinsurer with a sizeable investment income flow going forward, taking into account very favourable prevailing local interest rates. This is expected to facilitate an elevation in prospective earnings capacity to very high levels over the short term, with the reinsurer’s operating margin budgeted to equate to 65%. Management expects to harness cost efficiencies, while maintaining a competitive loss ratio, resulting in stronger underwriting margins over the medium term.
Mainstream Re is one of three locally registered reinsurers in Ghana. Whilst the reinsurer benefits from local content cessions, as well as close to market presence, the balance sheet and premium levels in absolute terms are viewed to be comparatively constrained in the context of other local and regional players operating in the market. As such, management expects to enhance competitive positioning over the medium term, supported by increased capacity allowing for increased participation across a broader risk spectrum. Retrocession agreements limit maximum deductibles to fairly conservative levels relative to capital, supported by moderately strong aggregate counterparty credit strength.
The international scale rating is impeded by the sovereign credit rating of The Republic of Ghana, given that the bulk of the reinsurer’s assets are domiciled locally, and the majority of revenues are derived domestically. As such, Mainstream Re’s international scale rating is expected to remain at this level, until such a time as the sovereign credit profile improves.
In light of the recent rating action taken, an upgrade of the rating is considered unlikely over the rating horizon. A downgrade may arise if the reinsurer is unable to sustain regulatory requirements. Negative rating action could also follow a sustained deterioration in operating performance and/or a weakening in liquidity metrics.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2008)||Initial rating (November 2008)|
|Claims paying ability: A-(GH)||Claims paying ability: B|
|Outlook: Stable||Outlook: Stable|
|Last rating (August 2015)||Last rating (August 2015)|
|Claims paying ability: A-(GH)||Claims paying ability: B-|
|Outlook: Stable||Outlook: Stable|
|Primary analyst||Secondary Analyst|
|Marc Chadwick||Munyaradzi Mushure|
|Sector Head: Insurance Ratings||Junior Credit Analyst|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Short Term Insurance Companies, updated July 2016
Mainstream Reinsurance Company Limited rating reports, 2008-2015
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
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 rating included:
- The audited financial statements as at December 2015
- Four years of comparative audited numbers
- Unaudited year to date results to 30 June 2015
- Budgeted financial statements to December 2016
- 2016 reinsurance cover notes
- Other related documents.
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S INSURANCE GLOSSARY
|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.|
|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.|
|Distribution Channel||The method utilised by the insurance company to sell its products to policyholders.|
|Enterprise Risk Management||ERM refers to an integrated or holistic approach to managing risk across an organisation, using clearly articulated frameworks and processes controlled from board level.|
|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.|
|International Scale Rating (“ISR”)||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.|
|Intermediary||A third party in the sale and administration of insurance products.|
|Interest||Money paid for the use of money.|
|Investment Portfolio||A collection of investments held by an individual investor or financial institution.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|National Scale Rating (“NSR”)||National Scale credit ratings express risk in relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.|
|Policyholder||The person in actual possession of an insurance policy.|
|Portfolio||All of the insurer’s in-force policies and outstanding losses, with respect to described segments of its business.|
|Premium||The price of insurance protection for a specified risk for a specified period of time.|
|Rating Horizon||The rating outlook period|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
|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.|
|Underwriting Margin||Measures efficiency of underwriting and expense management processes.|
For a detailed glossary of terms please click here
GCR upgrades Mainstream Reinsurance Company Limited’s rating to A(GH); Outlook Stable.