Fitch Assigns IC Alliance-Life Insurance JSC ‘B’ IFS; Outlook Stable
March 28. Fitch. LONDON/MOSCOW
Fitch Ratings has assigned Kazakhstan-based IC Alliance-Life Insurance JSC (Alliance-Life) an Insurer Financial Strength (IFS) rating of ‘B’ and a National IFS rating of ‘BB(kaz)’. The Outlooks are Stable.
KEY RATING DRIVERS
The ratings reflect a high concentration of Alliance-Life’s insurance portfolio in annuity business, negative net income in 2012 and the company’s short track record of operations, as well as the low credit quality of its investment portfolio. More positively, the ratings also take into account the shareholder support of KZT1bn provided in 2012 and the resulting satisfactory level of capitalisation. Alliance-Life’s insurance portfolio is significantly concentrated, with 78% of total gross written premiums (GWP) in annuity business in 2012. Fitch believes that this concentration makes Alliance-Life’s capital particularly vulnerable to longevity and interest rate risks inherent in annuity-type products and limits the company’s risk diversification. Fitch’s concerns are exacerbated by the short track record of the company’s operations, limited availability of mortality statistics and scarce investment opportunities in Kazakhstan. In particular, there is a significant duration mismatch between the assets and liabilities, due to the lack of suitable long-duration bonds. Alliance-Life reported a net loss of KZT1bn in 2012, for the most part caused by a one-off technical reserve adjustment and increase in the administrative expenses, as the company invested in the development of new insurance products. The company does not expect net income to be positive in 2013. In 2012 the company received capital injections totaling around KZT1bn from its shareholders, which helped to maintain its equity at KZT1.4bn at end-2012 (end-2011: KZT1.4bn). The main reason for the re-capitalisation was to cover the reserving deficiencies, as revealed by internal actuarial calculations. Fitch understands the insurance reserve increase was necessary because of the change in statutory requirements for the discount rate to be used. Fitch views the capital injections positively and considers them to be evidence of the shareholder’s willingness to support the company. The reserving deficiency was reflected in the fall in Alliance-Life’s statutory solvency margin cover to 49% at end-5M12. The solvency margin remained under 100% until Q412, when a tranche of KZT0.7bn of capital was injected. After the capital injection, the statutory solvency margin recovered and stood at 110% at end-2012. Following the capital injections, based on Fitch’s own internal assessment, Alliance-Life’s risk-adjusted capital position at end-2012 is in line with its ratings. The quality of Alliance-Life’s invested assets is relatively low, with significant holdings of below-investment-grade debt, in common with Kazakhstani insurers generally. The level of diversification is also low, with the majority of assets concentrated in the Kazakhstani banking sector. However, the liquidity profile of these investments is satisfactory.
Fitch would view a material decline in Alliance-Life’s risk-adjusted capitalisation or a sustained fall in its statutory solvency margin below 100% as triggers for a downgrade. Any indication that the shareholder would not be willing to support Alliance-Life would also be viewed negatively for the ratings. Alliance-Life’s ratings could be upgraded if the company’s insurance portfolio becomes materially less concentrated, or if it proves its ability to generate sustainable profit.