Baku, Azerbaijan, June 29
Standard & Poor's Ratings Services had lowered its long-term insurer financial strength and counterparty credit ratings on Kazakhstan-based JSC Oil Insurance Co. (NSK) to 'B' from 'B+'.
The outlook is stable. At the same time, we lowered the Kazakhstan national scale rating to 'kzBB+' from 'kzBBB'.
The downgrade reflects our view that the company's capital adequacy, liquidity, and financial flexibility have significantly weakened following a large claim recognized in May 2015. We note that the company currently plans to restore its financial standing by generating sufficient net income. We don't factor in any capital support provided by shareholders, because we have no clear view on their willingness to provide it or of the possible timing, the statement said.
Following a court decision in May 2015, NSK fully paid the claim on the aviation liability insurance in compensation for the death of the passengers in the amount Kazakhstan's tenge (KZT) 1.1 billion (about $5.5 million). Following this payment, the company's capital adequacy deteriorated dramatically, both based on Kazakhstan regulatory requirements and on our internal capital model. We therefore have revised our capital and earnings assessment to "less than adequate" from "lower adequate."
The company's operations are pressured by the regulatory solvency margin and liquidity ratio, which are both significantly below the required ratio of 1x. The company has provided a list of measures to the regulator that it intends to take in order to restore key figures. The list includes expected release of reserves, better control over acquisitions, and lowering administrative expenses. The company expects that it will be able to restore its solvency and liquidity ratios by the end of this year.
"Our base-case scenario is that the company will show a loss based on 2015 results," S&P said. "There is a possibility that the company's bottom-line results could be positive if, by the end of 2015, NSK is able to receive back the amount of the claim as a subrogation or win the appeal against the earlier court decision regarding the large claim. However, we understand that this process could be quite a lengthy one and can materialize at the earliest in 2016. We have therefore not factored such recovery into our expectations."
"We could lower the ratings if the company is unable to maintain its competitive position at the current level or is unable to generate marginally profitable business," S&P said. "If we consider that liquidity poses a severe risk to NSK's operations and its activity as a going concern, we will likely cap the rating at 'B-'."
A positive rating action is remote at this stage, unless the company is able to sustainably restore its capital via internal capital generation or as a result of winning the appeal. Receipt of an additional capital injection from its shareholders may support our assessments of capital and earnings and financial flexibility.
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