SINGAPORE--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating to C (Weak) from B- (Fair) and the Long-Term Issuer Credit Rating to “ccc+” from “bb-” of Royal Insurance Corporation of Bhutan Limited (RICB) (Bhutan). Concurrently, AM Best has maintained the under review with negative implications status on these Credit Ratings (ratings).
The ratings reflect RICB’s balance sheet strength, which AM Best categorizes as weak, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM).
The rating downgrades reflect a deterioration in AM Best’s view of RICB’s balance sheet strength and operating performance fundamentals. RICB’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), declined to a weak level in 2018 and is expected to remain subject to significant pressure and volatility over the near term. In 2018, the company reported a marked decline in shareholders’ equity as a result of a post-tax operating loss of BTN 1.2 billion (USD 18 million). This was driven principally by a provision for non-performing loans arising from its credit finance business. The company continues to exhibit a very high concentration of exposure to retail and commercial loans in Bhutan, with the performance of these assets in part correlated to economic conditions in the country.
In addition, concern has arisen regarding the company’s ability to strengthen its capital adequacy in a timely manner and comply with local regulatory solvency requirements on an ongoing basis. As at year-end 2018, the company’s regulatory capital adequacy ratio was below the minimum requirement. Regulatory restrictions and intervention have not occurred to date; however, this risk remains over the near term.
While RICB’s insurance operations remain profitable, its credit finance business has materially impeded overall operating results. The company’s management team continues to execute on a program of remedial actions aimed at improving the prospective performance of its loan portfolio, including strengthening enforcement of collections, loan refinancing and tighter underwriting controls. While these actions are viewed positively by AM Best, near-term operating results are expected to be subject to a heightened level of volatility arising from potential changes in provisions or write-offs for non-performing loans.
The continuation of the under review with negative implications status reflects AM Best’s expectation of near-term volatility in the company’s balance sheet strength and operating performance, as well as the potential for further deterioration in these key rating fundamentals. AM Best will continue to monitor closely near-term developments and expects to resolve the under review status when a forward-looking view on rating fundamentals can be determined.
Ratings are communicated to rated entities prior to publication. Unless stated otherwise, the ratings were not amended subsequent to that communication.
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