BAKU, Azerbaijan, Jun. 10
By Nargiz Sadikhova – Trend:
S&P Global Ratings affirmed its 'BBB' long-term insurer financial strength and issuer credit ratings on Kazakhstan-based insurer Eurasia Insurance Co. (Eurasia), the outlook is stable, Trend reports with reference to the S&P.
The S&P also affirmed its 'kzAAA' Kazakhstan national scale rating on Eurasia.
“We affirmed our ratings on Eurasia because we believe that the company's leading position in Kazakhstan'sproperty and casualty (P/C) insurance sector, business diversification into global reinsurance, very strong capital adequacy, and improving asset quality will allow it to withstand the pressure from the challenging operating environment in Kazakhstan and global reinsurance markets,” the report said.
S&P expects that the economic and financial consequences of the coronavirus pandemic, decreased oil prices, and capital market volatility will test Kazakhstan insurers' resilience over the next 12-24 months.
“We believe Eurasia's ample capital and liquidity buffers relative to its risks, combined with internationally diversified exposure, would allow it to survive a stress scenario associated with a Kazakhstan sovereign default. We therefore rate Eurasia one notch above the foreign and local currency sovereign ratings on Kazakhstan,” the report said.
S&P said that Eurasia kept its leading position in Kazakhstan's P/C insurance sector with a market share of 30 percent by gross written premium (GPW) in 2019.
“We believe that involvement in global reinsurance provides Eurasia with business diversification benefits. We expect that Eurasia's GPW will remain flat in 2020. On the one hand, we expect that the company's premiums from the local direct insurance business will be under pressure because of the challenging economic environment in Kazakhstan in the context of COVID-19 containment measures and oil price decline," the report said.
"On the other hand, we expect that the company's premiums from global reinsurance business will increase due to an upward trend in pricing and the increased demand for reinsurance capacity in global markets. We expect that the company's premiums will increase by around 10 percent annually in 2021-2022 after the economic situation stabilizes,” said S&P.
S&P added that it expects Eurasia to be able to keep its very strong capital adequacy in the next two years.
“We expect that Eurasia will be able to demonstrate solid operating performance with a combined (loss and expense) ratio of about 95 percent in the next two years. This is thanks to the company's prudent underwriting practices and limited exposure to the business lines that have suffered most from the COVID-19 pandemic (such as event cancellation, business interruption, mortgage, trade credit insurance, etc.),” the report said.
S&P also noted that the company improved its asset quality over the past 12 months by shifting a significant portion of its investments to the instruments of foreign issuers with ratings in the 'A' and above categories, which now make up about 22.5 percent of total investments.
“Overall, investment-grade bonds and deposits comprised 78% of the company's total fixed income investments at year-end 2019 (61% at end-2018). We believe, however, that the company's asset quality may come under pressure in the next two years, given the adverse conditions on the global financial markets,” the report said.
S&P added that the stable outlook reflects its expectation that Eurasia's strong competitive position in the Kazakhstan insurance sector and prudent underwriting and investment practices will allow it to withstand the pressures from the tightening operating environment in the local insurance market and the global reinsurance markets over the next two years.
“We could lower the ratings on Eurasia in the next 12-24 months if, contrary to our expectations, its profitability is undermined by competitive pressures in international or local markets. The likelihood of a positive rating action is remote over the next 12-24 months, owing to the company's lack of scale relative to higher-rated peers, and the material exposure of its insurance and investment portfolios to the domestic market," said S&P.
We could take a positive rating action in the longer term, however, if the company further increases the diversification of its insurance and investment operations to foreign markets and demonstrates its ability to keep the weighted average asset quality of its investments sustainably in the 'BBB' range,” the report said.
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