Fitch Affirms NOMAD’s IFS at ‘B-‘; Outlook Stable

March 06. Fitch Ratings

Fitch Affirms NOMAD's IFS at 'B-'; Outlook StableFitch Ratings has affirmed JBC Insurance Company NOMAD Insurance (Kazakhstan)’s (NOMAD) Insurer Financial Strength (IFS) rating at ‘B-‘ and National IFS rating at ‘BB-(kaz)’. The Outlooks are Stable.

The ratings continue to reflect NOMAD’s relatively weak capital position, risks related to the insurer’s rapid growth and presence of significant concentrations in the portfolio, which may potentially expose both the insurer’s top and bottom lines to significant volatility. The ratings are underpinned by NOMAD’s track record of positive underwriting profitability, although to some extent this has been supported by the contribution of a few large accounts with low loss activity. The ratings also take into account the moderate quality of the insurer’s investment portfolio.

Strengthening of NOMAD’s capital position or an improved diversification of the insurer’s business mix coupled with the profitable underwriting could lead to an upgrade. A reduction in shareholder support could be negative for the ratings.

Fitch continues to be concerned about NOMAD’s aggressive growth, which is depleting the insurer’s capital adequacy, despite earnings generated by underwriting activity. The compound average growth rate of NOMAD’s net premiums written (NPW) was 75% in 2006-2011, with growth particularly accelerating in the past two years, although this was in line with Fitch’s expectations. The capital position was further weakened in 2011 by a dividend withdrawal, with the payout ratio amounting to 80%.

Fitch notes that NOMAD may need to either get external capital injections or slow down its growth to prevent further erosion of its risk-adjusted capital position. At the same time, the agency notes that NOMAD is owned by an individual shareholder and it is therefore difficult to assess the insurer’s financial flexibility.

Fitch also notes that both major parts of NOMAD’s portfolio (single large accounts and regular business) contain a number of significant concentrations. The insurer has benefited from the low loss activity of some of the major policies and its underwriting performance is therefore significantly exposed to the risk of non-renewal of these policies.

NOMAD’s regular portfolio is highly concentrated in the compulsory motor third-party liability segment (MTPL). The agency is concerned about NOMAD’s dependence on the government regulation of MTPL pricing, and the tight competition existing in the segment. Changes in legislation and a further increase in competitive pressure could potentially have a significant impact on the line’s profitability. To some extent, these concerns have been mitigated by NOMAD’s track record of profitable operating performance since at least 2006, with underwriting operations being the key source of profit. The insurer’s investment income has also been a positive factor, albeit less significant for the operating result.

NOMAD’s investment portfolio continues to be prudently structured with equity instruments accounting for less than 1% at end-2011. However, Fitch notes that the portfolio diversification by industry is low, with most investments concentrated in Kazakhstan’s banking sector and issuers being of sub-investment-grade credit quality. To some extent, this is explained by the relative narrowness of the Kazakh investment market, Kazakhstan’s country ceiling and the strength of the local banking system.