AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” of Guild Insurance Limited (GIL) (Australia).
The ratings reflect GIL’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. In addition, the ratings factor in no rating lift or drag from the company’s 100% ultimate ownership by The Pharmacy Guild of Australia (PGOA).
GIL’s balance sheet strength is underpinned by its risk-adjusted capitalisation, which AM Best expects to remain at the strongest level over the medium term, as measured by Best’s Capital Adequacy Ratio (BCAR). During fiscal-year 2020 and for the first six months of 2021, the company has set aside provisions for potential COVID-19 related claims arising predominantly from business interruption coverages, which remain subject to a high level of uncertainty given the ongoing legal proceedings surrounding these policy coverages in Australia. Whilst GIL’s capital adequacy remains appropriate at present, future revisions of these provisions could drive volatility in its regulatory solvency and risk-adjusted capitalisation.
AM Best views GIL’s operating performance as adequate, with an average return-on-equity ratio (after tax) of 5% (fiscal-years 2016-2020). However, the company reported an operating loss and a combined ratio of approximately 105% in fiscal-year 2020, as a result of COVID-19 related provisions and higher-than-expected losses from weather events during the year. Prospectively, AM Best expects future revisions of COVID-19 related reserves to be a key driver of both technical and operating results over the near term. Whilst AM Best expects GIL’s operating results to benefit from planned pricing adjustments and increased operational efficiency over the medium term, investment income is expected to reduce given the low interest rate environment in Australia.
AM Best views GIL’s business profile as neutral. The company is considered a small insurer in Australia’s non-life sector, with gross premiums of AUD 213 million and an overall market share of below 1% in 2020. However, GIL is a leading provider of insurance protection to allied health professional associations, supported by its direct access to members of its parent, PGOA, which is a national employers’ organisation representing community pharmacies across Australia.
The revision of the outlooks to negative reflects increased pressure on GIL’s balance sheet strength and operating performance fundamentals. AM Best views the company’s near term operating results to be sensitive to revisions in COVID-19 related provisions and the challenging investment landscape. In addition, given GIL’s limited financial flexibility, its risk-adjusted capitalisation may exhibit heightened volatility in the event that prospective earnings fall outside of expectation.
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