GIC Re has a very strong balance sheet, adequate operating performance, favourable business profile and appropriate enterprise risk management (ERM), says AM Best.
Reflecting this, the international credit rating agency has affirmed a Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” for the state-run reinsurer.
GIC Re’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), is categorised as strongest at the end of the last fiscal year ended 31 March 2019 (FY2019), underpinned by relatively low underwriting leverage, a liquid investment portfolio and retrocession counterparties of high credit quality.
However, AM Best has revised the outlook of the ratings to negative from stable, saying that this reflects GIC Re’s persisting underwriting losses, which have grown in magnitude in recent years and increasingly have begun to hamper overall operating profitability.
While investment operations historically have offset technical losses, deteriorating underwriting results and an increased reliance on investment activities to support overall earnings are placing pressure on AM Best’s current operating performance assessment.
Going forward, AM Best expects elevated new business growth, which is forecast to outstrip the rate of internal capital generation, to result in risk-adjusted capitalisation trending lower, albeit remaining at the strongest level over the near term. Partially offsetting balance sheet factors include the company’s marginal local regulatory solvency ratio at 31 December 2019, and the company’s high common stock leverage, which exposes its balance sheet to volatility in the event of financial market instability in India.
GIC Re has a track record of reporting profitable overall operating results, as evidenced by a five-year average return-on-equity (ROE) ratio of 6% (2015-2019), as calculated by AM Best. However, the company’s ROE declined to 4% in FY2019, with an operating loss subsequently reported for the first nine months of FY2020.
These results follow weaker-than-expected underwriting performance, emanating principally from domestic lines of crop, motor, fire and health business, as well as from natural catastrophes events impacting GIC Re’s foreign business portfolio. The company’s combined ratio deteriorated to 106% in FY 2019 and to 116% for the first nine months of FY2020, as calculated by AM Best.
Prospectively, AM Best expects underwriting performance to remain strained by domestic and foreign lines of business. However, the negative trend may be abated partially by the rate increases that were implemented for domestic fire business, and management’s expectation of improving global reinsurance market conditions and an increased focus on underwriting discipline.
AM Best assesses GIC’s business profile as favourable. GIC is a leading reinsurer in India, with over a 75% market share based on ceded domestic written premiums. The company continues to have close relationships with direct insurers in India, and local regulations provide GIC Re with an advantage in obtaining domestic reinsurance placements. In addition, GIC Re maintains a geographically diversified underwriting portfolio, with approximately 30% of business sourced outside of India in FY2019.
AM Best views the company’s ERM as appropriate given the current size and complexity of its operations. Prospectively, as the operational scale and complexity of GIC Re’s key risks continue to increase, risk management capabilities and the sophistication of internal controls and governance will need to strengthen to support this.