Ratings Recap: CIS (Panama), Guild, Eurasia, Halyk-Kazakhinstrakh

March 5, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Panama’s Compania Internacional de Seguros S.A. (CIS), both with stable outlooks. Best said the ratings recognize CIS’ “consistently favorable operating results, excellent risk-based capitalization and strong market profile. As one of the largest insurers in Panama, CIS utilizes its comprehensive risk management procedures and local market expertise to enhance its operating performance. CIS’ well balanced book of business has produced strong underwriting results, which are complemented by stable investment income derived from a conservative investment portfolio. CIS’ operating results and investment income have led to substantial surplus appreciation over the past five years. Additionally, the company’s prudent underwriting philosophy and well diversified book of business generally have been profitable across both property/casualty and life/health business segments over the past five years. CIS also maintains liquidity and solvency margins in excess of the requirement of the Panamanian Superintendent of Insurance.” As partial offsetting factors Best cited “CIS’ challenge of operating in a highly competitive insurance market as well as in a country that Best considers to have an elevated level of country risk. While the CIS’ outlook is currently stable, potential positive rating triggers would include continued positive operating results and surplus growth. Possible negative rating triggers could include sustained deterioration in the company’s underwriting results, and consequently, a decline in its risk-based capitalization.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Australia’s Guild Insurance Limited (GIL), both with stable outlooks. The ratings reflect GIL’s” adequate risk-adjusted capitalization, solvency capital buffer and management’s initiatives to improve profitability,” said Best. GIL’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), remains supportive of its current ratings. Best explained that “while its reported capital position declined by 10 percent to A$82 million [US$87.74 million] in fiscal year 2011, the company maintains a sufficient solvency capital buffer as its insurance liabilities are reserved at a higher than required level of sufficiency. A hardening market, tighter underwriting and ongoing initiatives to strengthen technical pricing and realize cost efficiencies are expected to improve the company’s overall profitability and strengthen its capital position in fiscal year 2012. Latest management accounts suggest that GIL’s overall net profit is above budget.” As partial offsetting factors Best cited GIL’s “poor fiscal year 2011 underwriting results and expansion risks. An accumulation of large and smaller weather events and a general deterioration in liability lines resulted in a significant increase in claims. To address these issues, GIL has designed a number of remedial underwriting adjustments. The company has expansion plans aimed at personal and intermediated commercial insurance outside its core market. This could potentially lead to higher premium leverage if solvency capital does not increase at the same pace as premiums. Further, an expansion into these new markets before relevant infrastructure is in place to assess and price these new risks could negatively impact profitability and the company’s capital. A significant deterioration in the company’s risk-adjusted capitalization as measured by BCAR could lead to a downward pressure on the ratings. A sustained and significant improvement in the company’s underwriting profitability could result in an upward movement on the ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb+” of Kazakhstan’s Eurasia Insurance Company JSC, both with stable outlooks. “Eurasia’s risk-adjusted capitalization remains strong, Best noted. “Good internal capital generation has been supported by the full retention of earnings.” Best also indicated that “despite the commencement of dividend payments from 2011, risk-adjusted capitalization is expected to continue to be maintained at a sufficiently strong level to support the company’s ratings.” However, the report cited Eurasia’s “investments and reinsurance placements with low credit quality institutions” as a negative factor. Specifically, the company “maintains exposure to Kazakhstan’s banking and corporate sector, which exposes the company to the high financial system risk of the country. Additionally, 40 percent of outstanding claims recoverables (totaling KZT 406 million [$2.75 million]) are expected from reinsurers with vulnerable or unknown ratings.” Best also noted that Eurasia “consistently generates good operating performance. A pre-tax profit lower than the KZT 12.1 billion [$81.8 million] reported in 2010 (2009: KZT 4.6 billion [$31.1 million]) is expected in 2011, primarily due to a decline in technical profits. A combined ratio of 26.7 percent in 2010 (2009: 94.5 percent) was primarily supported by significant reserve releases due to a change in reserving methodology to a statistical based approach. Prior to 2010, reserves were established on a prescriptive basis as per Kazakh regulatory requirements.” Best also indicated that in the future Eurasia’s “operating performance is expected to remain good, although subject to some volatility, due to Eurasia’s changing business mix.” The company benefits from its “strong competitive position in the Kazakhstan market, where it maintains a 14.3 percent share of the market. The company underwrites a well diversified portfolio of insurance (representing 60 percent of gross written premiums) and reinsurance business focusing on short-tailed commercial risks. Eurasia is expected to focus on the growth of its reinsurance business outside Kazakhstan in the medium term, in line with the strategy to improve the diversification of its business. A.M. Best will continue to monitor Eurasia’s growth and profitability as it expands. 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. The credit profile of the banking affiliate is not currently viewed to negatively affect A.M. 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. A positive rating action would depend on the quality of investments, stability of operating performance and demonstrable improvement in Eurasia’s competitive position outside of the Kazakhstan market. Key factors that could trigger negative rating actions include a downward trend in underwriting performance, deterioration in risk-adjusted capitalization and the credit quality of investments, and sustained increase in credit risk exposure associated with the company’s reinsurance placements. A decline in country risk fundamentals also could have a negative impact on Eurasia’s ratings.

A.M. Best Europe – Rating Services Limited has upgraded the financial strength rating to ‘B++’ (Good) from’ B+’ (Good) and the issuer credit rating to “bbb” from “bbb-” of Halyk-Kazakhinstrakh, Insurance Subsidiary Company of Halyk Bank of Kazakhstan, JSC, both with stable outlooks. Best explained that the upgrades for Kazakhinstrakh “reflect its strong underwriting results and good competitive position in the Kazakhstan market, which has consistently supported strong financial performance over the last five years. The ratings also incorporate Kazakhinstrakh’s risk-adjusted capitalization, which remains at a sufficiently strong level.” In addition Best noted: “Kazakhinstrakh continues to enjoy a leading position as an insurer in Kazakhstan, maintaining a 15 percent share of the market in 2011. Gross written premiums are expected to grow by 65 percent to KZT 24 billion [$1.622 billion in 2011 due to a large one-off offshore oil fronting contract, as well as growth within its compulsory and medical insurance lines. Kazakhinstrakh’s portfolio is mainly focused on retail business. The company has opened a number of new branches by leveraging on its relationship with its owner, Halyk Bank, thereby taking advantage of its network. The company has also benefited from cross-selling opportunities, which has had a positive effect on sales. Prospective growth is expected to continue to be supported by Kazakhinstrakh’s excellent position within the medical insurance market. Kazakhinstrakh’s financial performance remains strong, as demonstrated by a five-year average return on capital and surplus of 20 percent. Earnings are consistently supported by excellent technical results (on an International Financial Reporting Standard basis), with a combined ratio not higher than 85 percent since 2006. In 2011, the company is expected to report a pre-tax profit of approximately KZT 2.7 billion [$18.25 million], reflecting a continuation of its strong underwriting performance, driven by a stable cost base and increased earned premiums, and a more favorable investment environment. Kazakhinstrakh maintains strong risk-adjusted capitalization, supported by higher retained earnings and a rise in capital, following an injection from its parent in 2008 and 2009. Best also indicated, however that the company is “exposed to some reinsurers with vulnerable or no ratings, as well as to sub-investment grade debt securities issued in the local Kazakh market, exposing Kazakhinstrakh to the high political and financial system risk of the country. A negative rating factor relates to the company’s catastrophe exposure modeling capabilities, which A.M. Best considers to be underdeveloped by international standards and could leave the company exposed to significant losses from a major event. Risk-adjusted capitalization incorporates a buffer to cushion against such losses. Upward rating actions could occur if Kazakhinstrakh reduced its exposure to poorly rated reinsurers and sub-investment grade securities. Improvement in the company’s loss modeling and enterprise risk management may also put upward pressure on the ratings. Negative rating actions could occur if the company experienced a large technical loss or deterioration in the performance of the company’s bond portfolio. A decline in country risk fundamentals could also have a negative impact on Kazakhinstrakh’s ratings.

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