Ratings Roundup: Eurasia, Kazakhinstrakh

February 28, 2013

A.M. Best Europe – Rating Services Ltd. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of the Kazakhstan-based Eurasia Insurance Company JSC, both with stable outlooks. Best said Eurasia’s ratings “reflect its strong business profile within the Kazakhstan market, strong risk-adjusted capitalization and good, albeit volatile, operating performance. The ratings also consider the company’s high country risk exposure, through its operation in Kazakhstan.” Best described Eurasia’s competitive position in Kazakhstan as “strong,” adding that the “company remains the leading (re)insurer in Kazakhstan, with gross written premiums of approximately KZT 27 billion [app. $180 million] in 2012. Eurasia maintains a well-diversified portfolio of direct and reinsurance business. The inwards reinsurance portfolio is largely focused on global risks and remains the main driver for expansion, as Eurasia continues to strengthen its profile as a reinsurer.” Best also noted that in 2012 “regulators enforced new rules relating to the use of reinsurance to encourage the domestication of (re)insurance business. Rules have been established that prescribe the level of risks that must be retained before ceding to the reinsurance market, and restricts the use of international reinsurers. Eurasia’s business profile is not expected to be materially affected by these new regulations. The requirement to cap the level of business ceded outside of Kazakhstan is likely to benefit Eurasia as the dominant reinsurer within the country. Additionally, Eurasia increasingly retains a high level of premium income in excess of the regulator’s requirements before ceding risks to the reinsurance market.” Best also said: “Eurasia’s risk-adjusted capitalization is expected to remain strong, supported by a rise in paid-up capital due to the reinvestment of a large portion of dividends paid in the year. A good pre-tax profit is anticipated, although materially lower than the KZT 9.8 billion [app. $65 million] reported in the previous year. Following a number of years of reporting positive underwriting results, Eurasia is expected to produce a combined ratio above 100 percent, due to the high level of large losses experienced in the year. The main drivers underpinning the company’s large loss exposure relate to several satellite losses.” Best said it “expects operating performance to remain subject to volatility, due to Eurasia’s changing business mix, mainly through the expansion of its inwards reinsurance portfolio. Eurasia’s ultimate parent, Eurasian Finance Company JSC, remains significantly exposed to the local Kazakh banking sector through its subsidiary, Eurasian Bank, which is considered to have vulnerable credit quality.” However, Best indicated that the credit profile of the banking affiliate is not currently viewed to negatively affect Best’s opinion of Eurasia’s financial strength, “largely due to the company’s operation within a regulatory regime, which makes the removal of capital from an insurance subsidiary relatively difficult.” Best said: “Positive rating actions would depend on the quality of Eurasia’s investments, increased stability of its operating performance and demonstrable improvement in its competitive position outside of the Kazakhstan market. Key factors that could trigger negative rating actions include a downward trend in the company’s underwriting performance, deterioration in risk-adjusted capitalization and a sustained increase in the credit risk exposure associated with Eurasia’s reinsurance placements. A decline in country risk fundamentals or the profile of its banking affiliate, Eurasian Bank, also could have a negative impact on Eurasia’s ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Halyk-Kazakhinstrakh, Insurance Subsidiary Company of Halyk Bank of Kazakhstan, JSC, based in Kazakhstan. The outlook for both ratings is stable. The ratings of Kazakhinstrakh reflect its “excellent risk-adjusted capitalization, good competitive position in the Kazakhstan market and consistently positive operating performance,” said Best. The ratings also consider the company’s “high country risk exposure through its operation in Kazakhstan.” Best also said: “Kazakhinstrakh’s risk-adjusted capitalization is expected to remain strong, supported by good internal capital generation. The company’s risk-adjusted capital position is supported by its reinsurance program, which is placed with reinsurers with good credit quality. In 2012, 92 percent of outstanding technical provisions where expected from reinsurers rated ‘A’- or higher.” Best also cited the “regulatory changes in 2012, restricting the use of foreign reinsurers by local Kazakh companies,” indicating that they are “not expected to significantly affect the credit quality of Kazakhinstrakh’s outward reinsurance business going forward. As the market’s third-largest insurer, Kazakhinstrakh maintains a good competitive position. The company maintains a well-diversified business portfolio, which is mainly focused on retail business. Gross written premiums are expected to fall by approximately 30 percent in 2012, mainly due to the absence of premium income derived from a large oil and gas contract written in 2011.” Best added that “Kazakhinstrakh’s operating performance remains strong, consistently supported by positive technical results and good underwriting earnings. A pre-tax profit higher than the KZT 2.7 billion ($13 million) produced in 2011 is expected in 2012. Results are expected to benefit from higher yields on Kazakhinstrakh’s fixed income portfolio. The level of investments in sub-investment grade securities represented 34 percent of total fixed income investments in 2012 (2011: 18 percent). No upward rating action is expected in the near term. Negative rating actions could occur if a decline in Kazakhinstrakh’s financial profile were to result in a deterioration of risk-adjusted capitalization to a level below Best’s expectations. A decline in country risk fundamentals could also drive negative pressure on the company’s ratings.”

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