State owned GIC Re has strongly countered the move by the AM Best,an international rating agency, to downgrade the reinsurer's financial strength credit rating below A- (Excellent) negative outlook, to B++ (Good) with stable outlook.
The revision of the rating by the AM Best is based on GIC Re's financials for FY 2019-20.
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). The outlook of the FSR has been revised to stable from negative whilst the Long-Term ICR outlook is negative, said the AM Best rating note on GIC Re on Thursday…
“We have already addressed the the key issues within our control of profitability and portfolio size We have taken further action to strengthen our balance sheet by increasing our outwards reinsurance purchases on the domestic portfolio by 37.5 percent, growing in size from USD 2.1 billion for 2019-20 to USD 2.7 bn for 2020-21, using high credit quality retro-cession counter parties,'' said GIC Re on Friday.
GIC Re cut its domestic agriculture capacity by 45%.Agriculture, which formed about 30 % of the risk portfolio on the back of government supported national crop scheme, is likely to shrink to about 18 percent during 2020-21. Thus, a major source of strain on GIC Re’s financials has been already addressed as at the date of this communique, said GIC Re.
“GIC Re has already led decisive action on the domestic Indian property portfolio in 2019/20. These improvements will feed into the financial results going forward. These together with supplemental measures on the underwriting discipline and portfolio rebalancing will put GIC Re on the path of sustained underwriting profitability, GIC Re added..
GIC Re domestic exposure to Covid-19 insurance claims is extremely limited. It may be noted that while capital and surplus had gone down by some 30 percent as at 31.03.2020, this has since improved in line with the global equity markets and will be reflected in our next financial statements.Overall our investment portfolio is weighted approximately 75% towards gilts, 20% equities and 5% other investments,said GIC Re..
With over a 75% market share in India based on strong domestic relationships and preferential right to GIC Re in domestic placements,the market position of GIC Re remains undiminished,said GIC Re. .
These Credit Ratings (ratings) reflect GIC Re’s balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, favourable business profile and appropriate enterprise risk management (ERM), said AM Best.
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 (BCAR), declined to the strong level at fiscal year-end 2020, as compared with the strongest level in fiscal year 2019 and prior. 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 explained.
Unfavourable movements in the fair value of GIC Re’s investment holdings follow global volatility in investment markets in the face of the prevailing COVID-19 pandemic.At the same time,GIC Re’s fast premium growth continues to outpace capital accumulation leading to lower risk-adjusted capitalisation. In addition, GIC Re’s regulatory solvency position at fiscal year-end 2020 was marginally above the regulatory minimum requirement. Positive balance sheet strength considerations include the company’s relatively modest underwriting leverage, its typically liquid investment portfolio and retrocession counterparties of high credit quality, said AM Best..
GIC Re's action plan
GIC Re on his defense has said that though the principal driver behind the rating revision by the AM Best is the impact of financial market volatility as a global consequence of the Covid-19 pandemic,GIC Re still has total assets of Rs 1,16,196 crores (excess of USD 15bn) and net worth of Rs 35,425 Crores (excess of USD 4.5bn) as at the end of March quarter of FY 2020-21.
GIC Re fully recognizes the recent under performance of elements of the portfolio and has already taken decisive actions in both portfolio composition and terms and conditions. AM best recognizes these significant actions. India did see some abnormal monsoon behaviour during 2019-20, which resulted in heavy agricultural losses for GIC Re. In response,
Our Syndicate 1947 at Lloyd’s and our subsidiaries at Johannesburg and Moscow stand on their own rating and are unaffected. They will continue to provide a high degree of service to their clients with the full backing of the parent.
GIC Re continues to enjoy the full and unqualified support of its key shareholders and remains 85% owned by the Indian Government.
GIC Re continues to value its stature, its relationships and its competitive ethics. It values the contribution it has been making and looks forward to continue to make to client’s businesses. It has stood by its clients and markets on a long-term relationship basis and avoided taking a path of opportunistic alliances, tactical gains and legalistic positions. We believe that this is the right philosophy and remain committed to our approach despite the difficulties faced by us. We remain confident that we will, on the strength of position outlined above sustain our relationship with you and sail through these temporary headwinds, said GIC Re..