Johannesburg, 25 June 2020 – GCR Ratings (“GCR”) has upgraded Mainstream Reinsurance Company Limited’s (“Mainstream Re”) national scale financial strength rating to AA-(GH), from A+(GH) and simultaneously affirmed the international scale financial strength rating of B-. Both ratings have been placed on Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook/Watch|
|Mainstream Reinsurance Company Limited||Financial strength||National||AA-(GH)||Stable Outlook|
|Financial strength||International||B-||Stable outlook|
Mainstream Re’s national scale financial strength rating upgrade reflects a sustained strength in risk adjusted capitalisation and liquidity, which is expected to absorb base case risks from the COVID-19 pandemic over the medium term. These credit positives are however partially diluted by a limited business profile.
Risk adjusted capitalisation continued to measure within a very strong range, with capital accumulation catering for the well contained, albeit growing risk base, and limited exposure to market risk. Accordingly, the GCR capital adequacy ratio (“CAR”) coverage persistently measured above 3x over the review period, while the statutory CAR remained above the regulatory minimum of 150% over the same period. Nonetheless, in absolute terms, the scale of the capital base is viewed to be moderate relative to regional competitors. 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 strong liquidity profile is supported by a relatively sizeable and highly liquid investment portfolio. As such, stressed financial assets coverage of net technical liabilities measured at 4.9x (FY18: 3.9x) while operational cash coverage registered at 21 months at FY19 (FY18: 22 months). Note is, however, taken of offsetting risks stemming from single banking counterparty concentration, with one bank holding approximately 45% of bank deposits at FY19. Going forward, liquidity metrics are projected to continue to register within a very strong range, supported by the reinsurer’s conservative asset allocation.
Earnings capacity is considered to be sound, with strong investment income supporting moderate underwriting profitability. Underwriting profitability has been supported by a well contained claims experience, a low-cost base and enhanced scale efficiencies. Mainstream Re’s large liquid asset balance is viewed to support a sustainable stream of realised investment income. In this respect, the reinsurer’s underwriting margin equated to 8% in FY19 (FY18: 5%) while the operating margin equated to 29% (FY18: 27%). 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 FY19 premiums written locally.
Risk adjusted capitalisation and liquidity are expected to remain at strengthened levels over the outlook horizon. In this regard, GCR CAR is likely to remain above 3x while liquidity and operational coverage ratios will remain above 2x and 12 months respectively. Premium growth may be suppressed as a result of COVID-19 related risks. As such, GCR has factored in the effects of reduced scale efficiencies as well as lower interest rates on earnings.
Positive rating action may stem from sustained improvement in geographic and line of business diversification as well as implementation of prudent banking counterparty risk management. Conversely, downward rating pressure may arise from a sustained deterioration in operating performance and/or a weakening in credit protection metrics beyond GCR’s base case expectations.
|Primary analyst||Sylvia Mhlanga||Senior Insurance Analyst|
|Johannesburg, ZA||Sylviam@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@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, May 2020.|
|GCR Insurance Sector Risk Scores, June 2020|
Mainstream Re Insurance Company Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Claims paying ability||Initial||National||A-(GH)||Stable||November 2008|
|Financial Strength||Last||National||A+(GH)||Stable||November 2019|
Risk Score Summary
|Rating Components & Factors||Risk score|
|Country risk score||3.50|
|Sector risk score||4.25|
|Management and governance||0.00|
|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.|
|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 ratings.
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 entity and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Four years of comparative audited financial statements to 31 December
- Full year budgeted financial statements for 2020;
- Unaudited interim results to 31 March 2020;
- Reinsurance cover notes for 2020; and
- Other relevant documents.