Eurasia Insurance outlook positive at S&P
June 21. Reuters
Standard & Poor’s Ratings Services revised its outlook on Kazakhstan-based Eurasia Insurance Co to positive from stable. At the same time, the ‘BB’ long-term counterparty credit and financial strength ratings and ‘kzA’ Kazakhstan national scale rating were affirmed.
The outlook revision reflects our view that Eurasia Insurance is gradually improving its competitive position, thanks to its steadily growing international book of business. In our view, Eurasia Insurance maintained sound operating results and preserved the stable mix and quality of its investment portfolio.
The ratings on Eurasia Insurance reflect the high industry and country risks in Kazakhstan and potentially high credit risks stemming from investments in the local banking sector and domestic corporate issuers. These negative factors are partially offset by good capitalization, including extremely strong risk-based capital adequacy, and good operating performance over the past several years.
With a market share of 11.6% on a net basis, Eurasia Insurance is the leading insurer in Kazakhstan, followed by Halyk-Kazakhinstrakh (not rated) with 7.4%, and Nomad Insurance (not rated) with 7.0%.
Eurasia Insurance has maintained a dominant position in inward reinsurance in 2011, with about 85% of the total market’s reinsurance volume in Kazakhstan. Premium volumes are trending upward. Although its focus is mainly on the region of the Commonwealth of Independent States, Eurasia Insurance also reinsures risk in 68 countries. We view as a ratings positive that Eurasia Insurance’s competitive standing is supported by its reinsurance capacity, which is the largest in the domestic market; good quality of service and expertise; and an advanced information-technology platform.
In our view, Eurasia Insurance has shown sound operating results over the past several years. Eurasia Insurance’s five-year average net combined ratio comprised 63%. In 2011, return on equity (ROE) and return on revenues reached 20% and 54%, respectively. We anticipate that Eurasia Insurance will be able to maintain its net combined ratio of less than 80% thanks to a stable expense ratio and a low loss ratio. ROE in 2012 is likely to be about 20%, which is in line with the company’s five-year average results.
In May 2012, Eurasia Insurance’s share capital reached Kazakhstani tenge (KZT) 40 billion (about $260 million$) reinforced by additional profits of KZT2.6 billion (about $17 million). In our view, Eurasia Insurance managed to maintain its risk-based capital adequacy at what we see as an extremely strong level. We do not anticipate that Eurasia Insurance’s risk-based capital position will fall below a very strong level. Capitalization is somewhat weaker, however, being good, because of the small absolute size of the capital base.
The investment portfolio’s average credit quality has stabilized at about ‘BB’, with diversification into adequate-quality foreign Eurobonds. On Dec. 31, 2011, 84% of the investment portfolio was placed in bonds and 14% was in cash and deposits with domestic banks. We do not expect the quality and mix of investments to change significantly, but the credit quality could be pressured by vulnerable investments in Kazakh instruments.
The positive outlook reflects our opinion that Eurasia Insurance will likely further enhance its competitive position while maintaining its current operating results and its investment profile.
We would consider an upgrade if Eurasia Insurance further strengthens its competitive standing by increasing premium volumes while delivering sound operating results and maintaining the current investment profile.
We could revise the outlook to stable if Eurasia Insurance’s competitive standing deteriorates due to a significant decline in premiums and the company subsequently loses its leading positions in the market.
Deterioration in the company’s operating results reflected in a net combined ratio of more than 100%, weaker credit quality of investments, or significant deterioration in the capital position could trigger a downgrade.
Related Criteria And Research
– Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
– Interactive Ratings Methodology, April 22, 2009
– Counterparty Credit Ratings And The Credit Framework, April 14, 2004
CreditWatch/Outlook Action; Ratings Affirmed
Eurasia Insurance Co.
Counterparty Credit Rating BB/Positive/- BB/Stable/-
Financial Strength Rating BB/Positive/- BB/Stable/-
Kazakhstan National Scale Rating kzA kzA