New India Assurance audit qualifications lead to rating downgrade to B++

New India Assurance Company's credit rating has been downgraded by insurance rating agency AM Best as the state-owned insurer's deficiencies in financial reporting continue to result in audit qualifications.

AM Best has downgraded New India's Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to BBB+ from A-.

The outlook of these credit ratings (ratings) has been revised to stable from negative. These ratings reflect New India's balance sheet strength, which AM Best categorises as very strong, as well as its adequate operating performance, favourable business profile and marginal enterprise risk management (ERM).

The rating downgrades follow a revision in AM Best's assessment of the PSU insurer's ERM from appropriate to marginal.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the US, the company does business in over 100 countries with regional offices in New York, London, Amsterdam,

Dubai, Hong Kong, Singapore and Mexico City.

"The company's deficiencies in financial reporting continue to result in audit qualifications. Whilst the company's audited accounts have been qualified for several years as a result of internal control weakness in the reconciliation of certain accounts, the company received two further matters of emphasis from auditors in fiscal-year 2020 related to claims and expense allocation," the rating agency said.

In addition, New India's persistent underwriting losses and volatility raise concern over the company's ability to select and price the risks appropriately. Whilst the unique features of India's market and the company's role as government-owned insurer may impact the strategy, AM Best considers New India's ERM to be below the global standards for an organisation of its scale, the agency said.

AM Best continues to view the company's balance sheet strength as very strong. This is supported by its risk-adjusted capitalisation, which remained at the strongest level as of March 31, 2020, as measured by Best's Capital Adequacy Ratio (BCAR).

However, New India's capital adequacy has deteriorated compared with the 2019 position, largely as a result of an approximately 30 per cent decline in its capital and surplus.

This was driven by a sharp fall in the market value of New India's equity investments. In addition, in the near to medium term, the capital and surplus might be negatively impacted by an additional pension liability of Rs 16.4 billion ($ 218 million) resulting from a recent regulatory amendment.

Consequently, the company's risk-adjusted capitalisation is increasingly sensitive to further investment market volatility and/or potential deterioration in the credit quality of the company's bond investment portfolio, amid the Covid-19 pandemic.

AM Best assesses New India's operating performance as adequate. New India has reported a five-year average return-on-equity (ROE) ratio of 3.5 per cent (fiscal years 2016 to 2020), as calculated by AM Best.

Underwriting performance, while improved in fiscal year 2020 compared with the prior year, has remained poor owing to persistent losses from its motor and health business, coupled with severe deteriorations in loss experience for engineering, crop and other miscellaneous classes of business in fiscal year 2020.

Furthermore, AM Best expects that investment income, which the company has relied on mainly to offset underwriting losses and produce operating profits for many years, could be weakened over the near to medium term as the central bank lowers interest rates and companies reduce dividend payouts to conserve resources during the current economic downturn.