LONDON--(BUSINESS WIRE)--A.M. Best has removed from under review with negative implications and downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” from “bbb+” and affirmed the Financial Strength Rating of B++ (Good) of Life Insurance Corporation (International) B.S.C. (c) (LICI) (Bahrain). The outlook assigned to these Credit Ratings (ratings) is negative.
The ratings were placed under review with negative implications on Oct. 13, 2017, following the release of the updated Best’s Credit Rating Methodology (BCRM). The ratings have been removed from under review, as A.M. Best has completed its analysis of LICI under the updated BCRM.
The downgrade reflects A.M. Best’s opinion that the rating fundamentals of LICI, as analysed under the updated BCRM, are supportive of the revised Long-Term ICR. The ratings reflect LICI’s balance sheet strength, which A.M. Best categorises as strong, as well as its adequate operating performance, neutral business profile, and appropriate enterprise risk management (ERM). The negative outlooks reflect pressures on the company’s balance sheet strength assessment that stem from its deteriorating risk-adjusted capitalisation, chiefly as a result of significant business growth and an increase in investment risk.
LICI’s balance-sheet strength is supported by risk-adjusted capitalisation which, measured by Best’s Capital Adequacy Ratio (BCAR), is considered strong, as well as the company’s highly liquid and diversified investment portfolio, and limited reinsurance dependency. However, LICI’s risk-adjusted capitalisation has declined significantly over recent years, primarily driven by increased capital requirements stemming from strong business growth and increased investment risk. Whilst the company has demonstrated its ability to generate capital organically, A.M. Best expects the increase in capital requirements derived from a growing profile to outpace prospective earnings retention, which could put further strain on risk-adjusted capitalisation.
The adequate operating performance assessment is underpinned by a track record of consistent profitability, with a five-year average return on equity of 10.2% at year-end 2016. LICI’s operating performance benefits from a relatively steady investment income, although A.M. best notes that the margin in excess of policyholders’ benefits and guarantees has reduced over recent years. This has been offset somewhat by the company’s increased economies of scale, with a low expense ratio of 5.5% in 2016, and by its strong mortality experience. A.M. Best expects LICI’s operating performance to remain adequate in the medium term.
Continued expansion translated into a five-year (2012-2016) compound annual growth rate of 27.6%, with gross written premium reaching BHD 151.4 million (USD 404.6 million) in 2016. LICI benefits from a niche market position, targeting the Indian expatriate community in the Gulf Cooperation Council (GCC) states by leveraging the Life Insurance Corporation of India group’s strong brand and the portability of its policies back to India. The company has an excellent market share of the life sector in the region, owing to the growing Indian community in the GCC, and maintains a strong distribution network to support its expansion.
ERM is viewed as appropriate considering the complexity of LICI’s operations. A.M. Best acknowledges that the company has improved its risk management capability in recent years. Nevertheless, as the company rapidly expands, it will become increasingly important for it to evolve its ERM practices, particularly in areas such as capital and asset-liability management.
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