Reinsurance News

AM Best downgrades Credit Ratings of GIC Re

3rd July 2020 - Author: Charlie Wood

AM Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” from “a-” of General Insurance Corporation of India (GIC Re) (India).

AM BestThe outlook of the FSR has been revised to stable from negative whilst the Long-Term ICR outlook is negative.AM Best attributes these Credit Ratings (ratings) to GIC Re’s strong balance sheet, as well as its adequate operating performance, favourable business profile and appropriate enterprise risk management.

The rating downgrades follow a deterioration in AM Best’s view of GIC Re’s balance sheet strength fundamentals.

GIC Re’s risk-adjusted capitalisation, as measured by Best Capital Adequacy Ratio, declined to the strong level at fiscal year-end 2020, as compared with the strongest level in fiscal year 2019 and prior.

AM Best notes that this deterioration follows an approximately 30% decline in GIC Re’s reported capital and surplus in fiscal year 2020 due to a significant fall in the market value of its equity investments, as well as from the reporting of a full year operating loss.

AM Best assesses GIC Re’s operating performance as adequate, with GIC Re reporting a five-year average return-on-equity ratio of 5%.

However, the company posted an operating loss in fiscal year 2020 following weaker-than-expected underwriting performance, emanating principally from its domestic lines of crop, motor, fire and health business, as well as from natural catastrophe events impacting GIC Re’s foreign business portfolio.

The company’s combined ratio deteriorated to 106% in fiscal year 2019 and to over 110% in fiscal year 2020.

Over the medium term, AM Best believes the negative trend in underwriting performance may be moderated partially by the recent imposition of premium rate increases and changes to reinsurance treaty terms for domestic fire and crop business, and from an increased focus on underwriting discipline.

In addition, the company’s exposure to crop business has been reduced significantly starting in fiscal year 2021.

Notwithstanding this, competitive market conditions and disruption borne by the COVID-19 pandemic remain key challenges for GIC Re over the near term.

AM Best assesses GIC Re’s business profile as favourable and notes how it continues to have close relationships with direct insurers in India, and local regulations provide GIC Re with an advantage in obtaining domestic reinsurance placements.

The negative outlook for the Long-Term ICR reflects AM Best’s concern that continued underwriting losses, coupled with the potential for further volatility in India’s investment markets amid the prevailing COVID-19 pandemic, may further pressure GIC Re’s operating performance and balance sheet strength fundamentals.

In recent years, the company has relied on investment returns and realised gains to offset the reported underwriting losses and grow its capital base; however, under the current conditions, such a model may no longer be sustainable.

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