A.M. Best Downgrades Issuer Credit Rating of Ghana Reinsurance Company Limited

A.M. Best Europe – Rating Services Limited has downgraded the issuer credit rating (ICR) to “bb” from “bb+” and affirmed the financial strength rating of B (Fair) of Ghana Reinsurance Company Limited (Ghana Re) (Ghana). The outlook for both ratings has been revised to stable from negative.

The downgrading of the ICR of Ghana Re reflects its weakened business profile within its core market following the removal of the compulsory legal cessions, which obliged insurers in Ghana to cede 20% of their business written to Ghana Re. The revision of the outlook to stable is supported by the expectation that Ghana Re will continue to maintain risk-adjusted capitalisation at a sufficiently strong level to support its business plans.

Ghana Re’s business volumes continue to be negatively affected by the repeal of the compulsory legal cession in 2008, despite the company’s efforts to retain business by introducing special quota share arrangements, which offer high commissions. In 2011, Ghana Re is expected to report consolidated gross written premiums of between GHC 40 million and GHC 45 million, a decline of approximately 20% since year-end 2008. To counteract the impact of its diminishing business profile in Ghana, the company seeks to focus its expansion in other African markets, largely supported by its developing presence through recently opened branch offices in Cameroon and Kenya. A rise in gross written premiums of approximately 25% is expected in each of the next two years. Given the high level of competition and Ghana Re’s limited presence in some of its targeted markets, A.M. Best believes that there is significant execution risk associated with its planned expansion.

Although premium volumes from Ghana Re’s outstanding debtors have fallen since the removal of the compulsory cessions, the size of outstanding premium debtors relative to the size of the balance sheet and written premiums remains a concern. Premium volumes from outstanding debtors are expected to represent approximately 60% of gross written premiums at year-end 2011 (2010: 57%). In A.M. Best’s view, adequate procedures are not yet in place to improve premium collection.

Ghana Re’s operating performance remains good. A pre-tax profit of approximately GHC 20 million is anticipated in 2011 (2010: GHC 16.8 million) underpinned by low claims activity during the year and lower expenses resulting from a number of insurers non renewing business through the special quota share arrangement. A.M. Best remains concerned over future underwriting profitability, given the company’s rapid growth plans into non-core regions.

Ghana Re operates predominantly as a non-life reinsurer (representing approximately 95% of its business), with business derived from Ghana currently accounting for around 70% of gross written premiums. The company maintains a fairly diversified portfolio, with fire and motor business representing approximately 70% of its underwriting portfolio. Ghana Re has a limited distribution network owing to the direct nature of the Ghanaian commercial market. However, A.M. Best expects that the spread of its distribution channels will improve as the company strengthens its relationships with existing brokers to support expansion outside Ghana.

Upward rating pressures may arise in the medium term if there are improvements in Ghana Re’s business profile whilst maintaining strong risk-adjusted capitalisation and a good underwriting performance.

Downward rating pressures may be triggered by a worsening of Ghana Re’s risk-adjusted capitalisation or deterioration in its business profile. In addition, an increase in the country risk profile of Ghana may also have a negative impact on its ratings.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilised include: “Risk Management and the Rating Process for Insurance Companies”; “Catastrophe Analysis in A.M. Best Ratings”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding Universal BCAR”; and “Assessing Country Risk”. Methodologies can be found at http://www.ambest.com/ratings/methodology.

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: http://www3.ambest.com/emea/ambersdisclosure.pdf

A.M. Best Europe – Rating Services Limited is a subsidiary of A.M. Best Company. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source.