IRB Brasil Re review concludes with negative outlook: AM Best

AM Best has concluded its review of Brazil's major reinsurer IRB Brasil Re, affirming its financial strength rating of A- and a negative outlook.

The reinsurer was placed 'under review with negative implications' by AM Best in March this year, followed by a FSR downgrade to A- from A in June, citing concerns over its governance and risk management following an internal investigation which ultimately resulted in a special regulatory inspection and high-level departures causing uncertainty regarding the strategic direction of the company.

The ratings agency had raised concerns over IRB’s enterprise risk management (ERM), following the company’s failure to establish adequate risk management tools to ensure meeting appropriate regulatory liquidity metrics.

AM Best stated that although the insurer has made strategic changes in its underwriting practices and improved its ERM, IRB still remains under special regulatory inspection by the Superintendência de Seguros Privados (SUSEP), the Brazilian re/insurance industry regulatory authority.

It believes that after the resolution of the regulatory supervision, the company’s ERM still will need to be tested and evaluated over a longer period before it can be considered appropriate given IRB’s business profile.

The negative outlooks reflect AM Best’s concerns of continued pressure on the company’s operating performance and profitability, as well as balance sheet strength over the intermediate term.

"While the company continues to execute a viable turnaround strategy, IRB faces instability in its operating results stemming from certain lines of business and prior-year reserve development, creating heightened execution risk," it said.

AM Best sees the potential for IRB’s operating performance and balance sheet strength to deteriorate, if its results continue to be impacted negatively and reserves continue to develop adversely in the near term.

IRB’s operating performance has recently been impacted by prior-year reserve development from natural catastrophe events, and losses from the life reinsurance line of business, which required the company to restate its 2018 and 2019 financial statements, as well as the COVID-19 pandemic.

AM Best believes that the company is appropriately rated at this time and does not see any positive movement in the short to near term, but warned that material deterioration of its balance sheet strength or operating performance could cause negative rating actions.