S&P assigns its credit rating to Kazakhstan’s Freedom Finance Insurance

Finance Materials 22 November 2019 11:21 (UTC +04:00)
S&P assigns its credit rating to Kazakhstan’s Freedom Finance Insurance

BAKU, Azerbaijan, Nov.22

By Nargiz Sadikhova - Trend:

S&P Global Ratings today assigned its 'B' issuer credit rating and ‘kzBB+’ national scale rating to Kazakhstan’s Freedom Finance Insurance (FFI) insurance company, the outlook is stable, Trend reports with reference to the S&P report.

“The stable outlook reflects our view that FFI will succeed in gradually establishing its franchise in Kazakhstan over the next 12 months. It also factors in our expectation that FFI will preserve a sufficient capital cushion and earnings relative to the complexity of risks that it will write during this period,” the report said.

S&P expects 2019-2020 premium growth will be sufficient to support FFI as it improves its earnings and establishes its competitive standing in the Kazakhstan market. However, any shortfalls in these areas could lead to a negative rating action in the next 12 months. This could stem from a weakening of FFI's competitive position due to underwriting losses or an inability to penetrate targeted insurance segments.

“We could take a negative rating action in the next 12 months if FFI's capital adequacy weakened in the absence of further capital support from the owner. We could also take a rating action if FFI revised its investment strategy, resulting in a significant drop in the average quality of invested assets to 'BB' or below. A positive rating action is unlikely within the next 12 months. It would most likely depend on better-than-expected operating performance. This could happen if execution risk reduces as the company establishes its presence and reputation in Kazakhstan and maintains stable operating performance, supporting an improvement in the insurer's competitive position,” the report said.

S&P expects FFI's unique digital distribution to support the company as it rapidly establishes a business position in Kazakhstan, in particular in the retail sector.

“Management aims to write a primary book of general nonlife business in Kazakhstan, with an emphasis on motor insurance and some corporate lines. We primarily expect FFI's business will come from the open market,” the report said.

S&P assesses FFI’s capital adequacy as extremely strong and sufficient to support its current business volume.

“Our assessment also reflects our expectation that FFI will achieve rapid premium expansion of about 15 percent in 2020-2021, from a low base. In our base-case scenario, we expect FFI will report a net loss after tax in 2019 and modest, albeit positive, net income in 2020, supported primarily by investment income in 2020,” the report said.

S&P also estimates FFI will report a net property/casualty combined ratio above 120% on average in 2019-2020.

“However, it will gradually improve to below 100 percent. The absolute size of FFI’s capital base--with shareholder equity of about $8.7 million, which could be sensitive to a single major event--constrains our capital assessment. In our forecast, we assume no dividend payouts in the next two years and capital injection of about one billion tenge ($2.5 million) per year, which will support the company’s growth in the next two years,” the report said.

According to S&P, FFI has a fairly conservative investment strategy: most of the company's portfolio comprises cash, bank deposits, and government-related entity or government bonds of 'BBB' credit quality.

“This supports our view of the company's modest risk tolerance. FFI has limited exposure to high-risk assets and foreign-exchange exposure because most assets and liabilities are denominated in Kazakh tenge,” the report said.


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