BAKU, Azerbaijan, Jun. 23
By Nargiz Sadikhova - Trend:
S&P Global Ratings affirmed its 'B+' long-term insurer financial strength and issuer credit ratings on Kazakhstan-based Oil Insurance Co. (NKS), the outlook is stable, Trend reports with reference to the S&P.
S&P also affirmed its 'kzBBB' Kazakhstan national scale rating on NSK.
“We affirmed our ratings on NSK because we believe that the company will be able to keep its competitive position as a midsize player on the Kazakhstan property/casualty (P/C) insurance market and maintain its capitalization at the current level, despite the tightening operating environment and the higher-than-expected dividends paid in April 2020,” the report said.
S&P expects that NSK's premium growth will be muted in 2020, due to the lower demand for insurance in the context of COVID-19 containment measures and economic contraction in Kazakhstan by S&P forecast of about 3 percent in 2020.
“In addition, we consider that the company's combined (loss and expense) ratio may increase to around 105 percent this year. In particular, we believe that the company's claims ratio may increase in those lines of business where claims payments are linked to foreign currency, such as the motor segment. We think that NSK is following reasonable underwriting standards and we expect a gradual improvement of operating profitability in 2021-2022 once the economic environment improves,” the report said.
S&P also expects that NSK will be able to sustain its capitalization at the current level despite significant dividend payments in April 2020 and weaker technical results than we expected previously.
“We understand that the shareholders' demand for dividends in 2019-2020 was linked to the financing of the acquisition of the company's shares last year. Our future forecast of capital adequacy implies that we do not expect future dividends to be as high, close to 50 percent of net income in 2021-2022,” the report said.
S&P said that even if it sees gradual improvements of the company's capital adequacy under its capital model, the absolute size of capital will continue limiting S&P’s overall assessment of capital and earnings until it exceeds the equivalent of $25 million, which S&P thinks will happen beyond our two-year rating horizon.
“We see positively that the company is gradually improving the weighted-average credit quality of its investment portfolio, which is in line with market trends for other players on the market. We believe that NSK has sufficient liquidity to meet its obligations in a stress scenario. We currently consider the company's governance as a neutral factor for the rating,” the report said.
However, S&P said it will monitor further the company's system of checks and balances.
“We think that while the company's capital buffers seem sufficient currently, the decision to pay high dividends in the tightening operating environment could constrain the company's ability to absorb unexpected risks,” the report said.
The stable outlook reflects S&P’s expectation that in the next 12 months NSK will be able to sustain its market share and maintain its current capital adequacy, complying with regulatory capital requirements, despite the pressure from the tightening operating environment in Kazakhstan's P/C insurance market in view of COVID-19 containment measures and expected economic contraction, the report said.
S&P said it also expects the insurer to maintain its conservative investment policy.
The ratings could be lowered in the next 12 months if NSK's:
- Capital deteriorated for a prolonged period below the 'BBB' level according to our capital model, squeezed either by weaker-than-expected operating performance, very high premium growth, investment losses, or higher-than-expected dividend payouts; or
- S&P observed weakening of the company's governance procedures; or
- The company's competitive position weakened, as shown, for example, by a material decline in premium volumes signifying loss of market share.
“We see a positive rating action in the next 12 months as remote, taking into account the company's weak business risk profile, volatile operating performance, and low capital in absolute terms,” the report said.
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