BAKU, Azerbaijan, Dec. 24
By Nargiz Sadikhova - Trend:
S&P Global Ratings affirmed its 'B+' long-term insurer financial strength and issuer credit ratings on Kazakhstan-based insurer Oil Insurance Co. (NSK), the outlook is stable, Trend reports citing S&P.
At the same time, S&P also affirmed its 'kzBBB' Kazakhstan national scale rating on NSK.
“We affirmed our ratings because we believe that NSK can gradually restore its capitalization, calculated under our capital model, following the higher-than-expected dividends paid in December 2020. NSK paid dividends of 825 million tenge ($1.9 million) in December 2020 in addition to 1.2 billion tenge ($2.8 million) in April 2020,” the report said.
S&P said it understands that shareholders' demand for these dividends was linked to the financing of their acquisition of the company's shares in 2019.
“In our forecast of NSK's future capital adequacy, we assume future dividends will not be as high, and project them at close to 50 percent of net income in 2021-2022. According to our capital model, the company's total adjusted capital was 16 percent below the 'BBB' confidence level in 2019 after adjustments for dividends paid in 2020 based on previous years’ profits. We expect NSK's capitalization to improve gradually to the ‘BBB’ category supported by improved underwriting results and favorable investment performance,” the report said.
NSK’s combined (loss and expense) ratio improved to 92 percent over the first 11 months of 2020 from around 102 percent a year ago, the S&P said.
“This was supported by fewer road accidents in Kazakhstan this year during lockdowns to contain the spread of COVID-19. We expect the combined ratio will increase to 95-96 percent in the next two years, taking into account intense competition on the local P/C market. We expect NSK’s investment performance will remain favorable, with the yield at around 5 percent in 2021-2022,” the report said.
The company's solvency ratio was 1.76x as of Dec. 1, 2020, including the dividend payout, comfortably above the minimum requirement of 1x. That said, the company's absolute capital remains significantly smaller than international peers' at about $16.2 million, on Dec. 1, 2020, which makes it more vulnerable to external shocks.
“Even if we saw gradual improvements of the company's capital adequacy under our capital model, the absolute size of capital would continue to limit our overall assessment of capital and earnings until it exceeds the equivalent of $25 million, which we think will happen beyond our two-year rating horizon,” the report said.
NSK's market share has been gradually increasing since the temporary restrictions on its licenses for compulsory insurance and inward reinsurance lines were lifted at the end of 2018.
The company managed to expand its premium base in 2020 despite the tight economic environment, with GPW increasing by around 20 percent in January through November compared with the same period a year ago.
“The company continues to focus on the motor segment, which accounted for about 46 percent of its GPW over the first 10 months of 2020 (35 percent obligatory motor third-party liability and 11 percent voluntary motor hull insurance). We expect NSK's portfolio structure to remain stable,” the report said.
The stable outlook reflects S&P’s expectation that NSK can gradually restore its capitalization under S&P Global Ratings' capital model after sizeable dividend payments, while maintaining its share of the P/C insurance market in the next 12 months.
S&P said it could lower our ratings 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, investment losses, or higher-than-expected dividend payouts; or
- The company’s competitive position weakened, as shown for example by a further material decline in premium volumes, signifying a 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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