Baku, Azerbaijan, Dec. 25
By Elena Kosolapova - Trend: International Rating Agency Fitch Ratings has revised the Outlooks on Kazakh Kompetenz Joint Stock Company's 'B' Insurer Financial Strength (IFS) rating and 'BB(kaz)' National IFS rating to Negative from Stable and affirmed the ratings, the agency reported on Dec. 25.
"The Outlook revision reflects the increased drag from the workers' compensation (WC) line on Kompetenz's underwriting performance in nine months of 2013," the agency said.
Kompetenz's underwriting loss grew significantly to 301 million tenge in nine months of 2013 from 103 million tenge in 2012 with losses from the WC line being the key driver for this deterioration. Due to a weak underwriting performance, Kompetenz also reported a net loss of 174 million tenge in nine months of 2013 (2012: net income of 108 million tenge). The loss reduced equity by 7.6 percent.
As the WC line was transferred by the Kazakh regulator to the life insurance sector from 2012, Kompetenz, like other local non-life insurers, has been managing the run-off of this line of business. Accident and disability risks are covered, with the latter experiencing a significant increase in claims frequency over the past few years. As a result, Kompetenz has experienced significant adverse prior-year reserve development and the line made a 46pp contribution to the insurer's total loss ratio of 59 percent in nine month of 2013 and 22pp to the loss ratio of 33 percent in 2012 respectively.
The WC line has been a market-wide challenge for Kazakh insurers both in the life and non-life sectors over the past two years. Fitch understands that the regulator is currently considering some potentially favourable changes to claims regulation for WC business that could limit reserving risk on existing portfolios. The changes could be enforced as soon as the middle of 2014. However, if favourable changes to the regulation of WC business do not materialise, Fitch believes that non-life insurers may remain exposed to the reserving risk for this line. Kompetenz appears to be particularly vulnerable to any absence of positive regulatory developments on WC due to its limited financial flexibility as it is a core operating company of an individual shareholder.
In addition to the risks stemming from the need to strengthen reserves for WC, Fitch also considers the cost base of the company as large. Kompetenz plans to grow rapidly so that its earnings are sufficient to support its expenses, but Fitch is concerned that the company may not be able to succeed in fully implementing its plans. Should the company be successful in its strategy, the agency also sees some execution risk in achieving this growth profitably. A strong growth strategy could temporarily improve the insurer's expense ratio, but could also put pressure on the insurer's underwriting profitability and increase acquisition costs.
Kompetenz's growth strategy is targeted at the retail and commercial segments. Fitch believes that the local competitive environment creates additional challenges, as the insurer is not affiliated with a local large industrial group nor does it have access to exclusive distribution channels which is a common business model for insurers in Kazakhstan.
Fitch considers Kompetenz's capital position as supportive of the current ratings, underpinned by significant levels of reinsurance, an investment portfolio of a credit quality at least commensurate with the rating and benefitting from the decline in net business volumes.
The ratings could be downgraded in the next 12 to 24 months if profitability does not improve as a result of the new strategy, or materially better performance is not achieved in WC. The ratings could also be downgraded if the insurer reports for a sustained period a statutory solvency margin below 100 percent.
The Outlook could be revised to Stable if Kompetenz manages to improve the underwriting result on its non-WC portfolio to an extent where it could offset any potential reduction in capital should additional WC reserve strengthening be required. This improvement would also need to be accompanied by a reduction in exposure to reserving risk related to the WC line.
The Outlook could also be revised to Stable if regulation of the WC line changes so that Kompetenz's reserving risk is materially reduced.