US-based credit rating agency AM Best has revised the long-term issuer credit rating (long-term ICR) outlook for General Insurance Corporation of India (GIC Re) to negative from stable due to “increasing pressure” on the state-run reinsurer’s enterprise risk management (ERM) assessment.
The rating agency has, however, reaffirmed the Financial Strength Rating (FSR) for GIC Re with stable outlook.
The revision of the long-term ICR outlook to negative from stable reflects AM Best’s view of increasing pressure on GIC’s Re’s ERM assessment. “In fiscal year 2022, the company’s financial accounts have been subject to a qualified audit opinion in respect of the reconciliation of receivables and payables, indicating deficiencies in internal financial controls. In addition, whilst management has taken action to strengthen the company’s ERM framework over recent years, the company’s risk culture and governance are viewed to be evolving at this stage,” the rating agency said.
AM Best said the reinsurer’s balance sheet strength assessment was underpinned by its risk-adjusted capitalisation, which remained at the strongest level at fiscal year-end (31 March) 2022, as measured by Best’s Capital Adequacy Ratio (BCAR). In addition, the company’s regulatory solvency ratio has strengthened over recent periods, although it remained sensitive to underwriting performance. Other balance sheet strength considerations included GIC Re’s high risk investment portfolio with substantial equity holdings, which has historically subjected the company’s reported capital and surplus to volatility due to unrealised equity investment movements.
“The company’s operating performance is assessed as adequate. GIC Re has reported positive operating results over the past five years with an average return-on-equity ratio of 3.9% (fiscal years 2018–2022). Although underwriting performance has been consistently loss-making over the past five years with an average combined ratio of 109.3%, the company has exhibited improvements in technical metrics in recent periods as a result of implementing portfolio remediation measures,” the rating agency said on Thursday, adding overall operating results remained reliant on investment income (including realised gains on trading securities) to offset underwriting losses, with the balance of earnings not expected to change materially over the near term.
The business profile assessment of favourable reflects GIC Re’s position as a leading reinsurer in India, with an approximate 70% market share, based on ceded domestic written premium in fiscal year 2021, it added.