Earnings from real estate investments and developments have become the key drivers of operating performance for Qatar General Insurance & Reinsurance Company (QGIRC), says AM Best.
Underwriting is making only a modest contribution to capital generation due to the low level of premiums written relative to the capital base, the international credit rating agency says.
With QGIRC showing an operating performance which no longer supports a strong assessment, AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” from “bbb+” and affirmed the Financial Strength Rating (FSR) of B++ (Good) of the insurer. The outlook of the Long-Term FSR has been revised to 'negative' from 'stable', whilst the outlook of the Long-Term ICR is negative.
Nevertheless, AM Best says that these credit ratings reflect QGIRC’s balance sheet strength, which the credit rating agency assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
QGIR’s five-year (2016-2020) weighted average return-on-equity ratio of -1.8% was impacted heavily by the negative revaluation of its real estate portfolio in 2019, which led to restatements of the 2017 and 2018 financial statements. However, underwriting has been profitable over the past five years, with the exception of 2019, when a series of large losses affected earnings. The group reported a pre-tax profit of QAR102m ($28m) for 2020, following three years of losses.
Prospectively, AM Best expects QGIRC to generate underwriting profits. However, the cost of debt service will drag on overall performance, while earnings from real estate development activities are likely to be volatile.
Balance sheet strength
The negative outlooks reflect concern regarding the adequacy of QGIRC’s risk management and internal controls following a regulatory solvency breach by a subsidiary, General Takaful Company, and asset impairments recognised in 2019.
QGIRC’s balance sheet strength is underpinned by very strong risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR). The balance sheet strength assessment benefits from high levels of liquidity to sustain its insurance operations and low premium leverage.
However, the group has a concentrated investment portfolio, with real estate assets accounting for approximately 69% of total investments at year-end 2020. Prospective risk-adjusted capitalisation is highly sensitive to domestic real estate and equity market fluctuations.
Additionally, QGIRC has a high level of debt compared to peers with a financial leverage ratio (debt to equity) of 46% at year-end 2020.
QGIRC, on a consolidated basis, has a well-established position within its domestic market reporting gross written premiums of QAR756m in 2020. It provides conventional and takaful insurance (via a separate subsidiary) and its underwriting operations are well diversified by product line.
AM Best notes that an unresolved remuneration dispute with a former senior manager creates a future earnings risk. Additionally, AM Best is closely monitoring the development of the group’s risk management capabilities relative to its risk profile and the implementation of redefined risk appetites and tolerances, following the changeover of several members of the senior management team, including the chief risk officer.