Himalayan Re Receives “B” Financial Strength Rating from AM Best

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As a young reinsurer, Himalayan Reinsurance’s operational performance is subject to potential volatility resulting from high operational risk and business execution risk, says AM Best, noting that the company’s operational performance is adequate .

Himalayan Re’s underwriting performance is expected to face negative pressure in the early years, partly due to high initial outlay and a lack of commercial scale, although gradual improvement is expected. The reinsurer received its operating license in June 2021.

Underwriting performance will also be heavily dependent on the company’s ability to find good quality domestic business. Investment returns, primarily from interest income, should be a key driver of earnings, especially in the early years.

Grades awarded

AM Best has assigned a financial strength rating of “B” (fair) and a long-term credit rating of “bb+” (fair) to Himalayan Re. The outlook assigned to these credit ratings is “stable”.

The ratings reflect Himalayan Re’s balance sheet strength, which AM Best assesses as strong, as well as adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).

Balance sheet strength

Himalayan Re’s balance sheet strength assessment is underpinned by a risk-adjusted capitalization that is expected to remain at the highest level during its first five years of operation, as measured by the capital adequacy ratio of Best (BCAR). AM Best believes the company’s initial capitalization of NPR 7 billion ($59 million) in paid-up capital supports the company’s expected growth during its five-year start-up phase.

In addition, financial flexibility should be enhanced by the company’s plan to go public in the short to medium term.

AM Best expects the company to maintain a low-risk investment portfolio, with a majority allocation in cash and term deposits, and the remainder mainly in fixed income securities. Offsetting balance sheet considerations include the company’s exposure to severe catastrophic events, although the risk is mitigated in part by the use of retrocession.

Profile

Himalayan Re’s business profile is considered limited. As the new national reinsurer, the second in the Nepalese market but the first to be private, Himalayan Re does not have an established position in the market and is expected to face increasing competition as it increases its market share. .

AM Best expects the company’s business growth to benefit from regulatory developments, including a first right of refusal for domestic reinsurance business that has been granted to domestic reinsurers, including Himalayan Re. The underwriting portfolio should display a focus on property and engineering risks. Additionally, the company will have a geographic focus in Nepal, but with gradual diversification expected over time.

AM Best considers the company’s ERM framework to be adequate, supported by a risk governance structure that has been put in place and risk management policies and procedures, which should be refined over time. Risk management capabilities are supported by an experienced management team that brings technical expertise and relevant industry experience.

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