SINGAPORE: Insurance sector rating agency AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of New India Assurance Company Limited.
These ratings reflect New India’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management (ERM).
The negative outlooks reflect New India’s recent track record of poor underwriting performance, which has fallen short of its own projections for several years. In the 12-month period ending March 2019, New India’s combined ratio increased considerably to 124% from 113%.
New India’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is categorized as strongest, underpinned by the company’s low underwriting leverage, adequate reinsurance supports and strong financial flexibility.
The company’s capital base of INR 382 billion (USD 5.5 billion) is the largest among direct non-life insurers in India as of March 31, 2019. However, an offsetting factor is New India’s high exposure to market risk due to a large equity investment that equals approximately 67% of capital and surplus.
AM Best views New India’s operating performance as adequate given its track record of overall profitability between fiscal-years 2015 and 2019. During this period, the company delivered an average return on equity of 3.4% and an average adjusted operating ratio of 92% (including realized gains from the sale of equity).
However, the company faces severe competition in the motor own-damage and health business, as well as an inadequate tariff rate for motor third party, all of which have resulted in persistent underwriting losses for the entire market and New India. While the company has generated sufficient investment income to offset its unfavorable technical results, AM Best is concerned with the company’s weak underwriting performance.
If the magnitude of underwriting losses persists or deteriorates further, AM Best may lower its assessment level of New India’s operating performance.
With regard to business profile, the company has been the biggest player in India’s non-life insurance market by premium for decades. As of September 2019, the company accounted for 14% market share and maintained a dominant position in almost every line of business.
Furthermore, the company is well-diversified in terms of geographical spread, line of business and distribution channel. In comparison with local peers, it stands out as the only direct insurer with a considerable global footprint.
The company’s ERM program, which AM Best considers appropriate, includes a comprehensive reinsurance program for all lines of business and natural catastrophes, and risk appetite for key financial metrics, as well as documented policies and underwriting guidelines. However, internal control weakness in the reconciliation of certain accounts has been identified by New India’s auditor over several years.
The company continues to implement corrective actions; yet, the issues are due partially to a lack of effective automation and coordination between payments systems of government-owned insurers. AM Best is concerned that continued weakness of internal controls may put pressure on New India’s results, as the company’s operations and risks have grown fast in size and complexity.