GIC Re’s downgrade adds to Srivastava’s challenges

GIC Re continues to struggle with big underwriting losses and has yet to inspire confidence that its plans for a return to profitability are working.

India’s only domestic reinsurer booked underwriting losses of Rs7.2 billion (US$96.2 million) during the past financial year and saw a 12.4% fall in the value of its investment book during the last quarter, when Covid-19 affected its equity-heavy portfolio. At just 153%, its solvency ratio is only marginally above the regulatory minimum of 150%.

This balance sheet weakness has prompted AM Best to downgrade GIC’s financial strength rating and its credit rating.

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

A spokesperson for GIC Re told InsuranceAsia News (IAN) that it isn’t “in agreement that its balance sheet has deteriorated” and that “it’s a temporary phenomenon” adding: ” [Am Best] in their report has mentioned that GIC Re’s balance sheet is ‘strong’.”

The spokesperson explained: “The basic reason for the year-end result can be attributed to our accounting policy which evaluates the equity holding as on a date and on March 31 2020, the financial market exhibited extreme volatility due to the Covid-19 pandemic and the surprise national lockdown which was announced the week before.”

Devesh Srivastava, who succeeded Alice Vaidyan as chairman and managing director in December, has his work cut out to chart a route back to more disciplined underwriting.

The weaker-than-expected underwriting performance during the past year was mostly caused by domestic lines of crop, motor, fire and health business, as well as from natural catastrophe events impacting GIC Re’s foreign business portfolio, according to the rating agency.

The good news is that Covid-19 should have a relatively limited effect on the underwriting side of the business.

A strategy of diversification during recent years has seen GIC take on a growing international book of business, with 30% of its premiums now coming from outside India. However, this has served only to diversify the source of its losses — a combined ratio of 118.5% on foreign business versus 112.7% on domestic.

“Over the last three years we’ve just seen a whole of host of factors play out and hurt their underwriting profitability,” says Madhukar Ladha, an analyst at HDFC Securities. “They’re trying to reduce the business they write internationally to reduce loss ratios but it doesn’t seem to be happening.”

In India, high crop losses were a result of heavy unseasonal rainfall that caused post-harvest losses, which added to the development of losses from the previous year. Management has said that it will cut capacity on crop lines by roughly 40% and implement stricter loss corridors, but Ladha says he is yet to see evidence of this.

On the investment side, GIC allocates over 20% of its investments to equities, making it particularly sensitive to the volatile conditions that have prevailed in global markets since the pandemic took hold.

The good news is that Covid-19 should have a relatively limited effect on the underwriting side of the business. The industry’s overall exposure in India is relatively low, with most of the direct healthcare costs being borne by India’s government hospitals. Outside India, GIC’s international book is only minimally exposed to life and health — at less than 2%.

There is some indirect exposure, according to Ladha, including a £4 million (US$5 million) loss as part of the treaty insuring the Wimbledon tennis tournament, which was cancelled due to Covid-19. But the pandemic should not be a significant event for the company’s underwriting book.

“Over the last three years we’ve just seen a whole of host of factors play out and hurt their underwriting profitability.” Madhukar Ladha, HDFC Securities

Under Srivastava (pictured), GIC is expected to continue to reduce the international business it writes and to shift the investment book towards longer-term fixed-income securities. He has also said that the company secured broad 10% to 15% price increases during this year’s renewals.

Much more still needs to be done to secure the confidence of investors. The company’s stock price has been on a downward trajectory ever since its initial public offering in 2017 and is less than half the value it was in October, despite a slight recovery from the Covid-19 low point in early March.

A GIC Re spokesperson added: “Immediate need for capital infusion is not felt as other corrective measures had already been taken and were in the process of taking effect and are likely to yield positive results as regards improving our solvency. These include getting our receivables in order, improving our cash flow, prudent underwriting, curbing commitments on the classes which [are] the main bone of contention.”

Indeed, its stock price is so low that most analysts have a buy rating on it. As the national reinsurer, GIC enjoys such a strong advantage in such a fast-growing market that it can hardly fail to do better.

A market player with extensive experience in India told IAN: “[Srivastava] is a first class professional with international experience and there is no reason for any lack of confidence in his ability to restore profitability.”

But Srivastava needs to deliver meaningful improvements, and quickly, to revive confidence.

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