Fitch affirms ratings of Insurance company Alliance Policy; outlook Stable

June 15. KASE. Fitch Ratings. Moscow

Fitch affirms ratings of Insurance company Alliance Policy; outlook StableFitch Ratings has affirmed JSC IC Alliance Polis’s (Alliance Polis) Insurer Financial Strength (IFS) rating at ‘B’ and National IFS rating at ‘BB+(kaz)’. The Outlooks are Stable.

KEY RATING DRIVERS

The ratings reflect Alliance Polis’s weak operating performance, its capital score under Fitch’s Prism capital model, which is below ‘somewhat weak’, and the moderate quality of its investment assets. The ratings also take into account the track record of capital support from the existing shareholder and reduced uncertainty over the workers’ compensation (WC) reserving risk.

In 2014 Alliance Polis reported a KZT1.2bn net loss, which was a combination of a negative KZT1.6bn underwriting result and positive investment income. This was a significant improvement from the KZT2.7bn net loss and KZT3.3bn underwriting loss in 2013, when the insurer experienced a major negative reserve development for the WC line. Net of this one-off reserve development, Alliance Polis’s underwriting performance also moderately improved in 2014 from 2013 mainly due to expense economies.

The insurer’s combined ratio improved to 129% in 2014 from 239% in 2013 largely due to the reduced volatility in the WC loss ratio. However, net of the WC line, the insurer’s loss ratio deteriorated to 54% in 2014 from 45% in 2013. A release of the  claims case reserve in the general third-party liability line was the key driver of a better loss ratio in 2013. With an average loss ratio of 47% in 2009-2012, the insurer demonstrates relatively stable underwriting discipline in the non-WC portfolio.

In 4M15 the insurer reported a KZT0.5bn loss, a weakening from the KZT0.3bn loss in 4M14 due to lower investment income. The combined ratio improved to 124% from 144% in the same period driven by a stronger loss ratio, while other components remained the same.

In May 2015 Kazakhstan enforced the long-standing regulations on professional diseases, disability and WC insurance. The changes have been positive for the insurers exposed to WC insurance, as coverage will be reduced and a moderate release of the line’s incurred-but-not-reported reserves is expected. Fitch does not  expect this release to have a major immediate effect on Alliance Polis’s net result. The schedule and amount of the reserve release should be available after the  next regular actuarial review.

Alliance Polis’s combined ratio continues to be pressured by administrative expenses, which remained large at 59% in 2014. This was an improvement from 69% in 2013 in the context of 94% growth of gross written premium (GWP) in 2014 after a reduction by 25% in 2013. The premium growth was relatively diversified, with compulsory motor third-party liability, health and property lines being the drivers of growth. Positively, GWP growth was accompanied by stable levels of acquisition costs. Fitch believes that a reduction in the expense ratio, either through a cut in expenses or expense economies made at the point of business growth, would be essential for a healthier underwriting result.

The net loss has continued to erode Alliance Polis’s equity, although the shareholder’s support has largely limited the amount of the erosion. In accordance with the commitment, the shareholder injected KZT1bn of capital in 4Q14. As a result, equity had shrunk only by 11% to KZT3.2bn at end-2014 in the context of a negative return on adjusted equity (ROAE) of 35% in 2014 (2013: minus 53%). The loss-making performance has reduced the capital further to KZT2.8bn at end-4M15. In response, the shareholder plans to support the insurer with a further KZT1bn in 2H15.

Despite the capital erosion, the insurer’s regulatory capital remains strong with the solvency margin at 174% at end-4M15 (end-2014: 142%). The required capital component under the regulatory solvency formula continues to be driven by the local minimum capital requirement in absolute terms. The volume of business has  been too low so far to determine the required capital under this Solvency I-like formula, but may well overrun the minimum capital in 2015.

From a Prism factor-based capital model perspective, Alliance Polis’s risk-adjusted capital score remains below ‘somewhat weak’ based on 2014 results. It demonstrates a moderate negative trend compared with 2013. Target capital has increased, driven by 81% growth of net written premiums (NWP) in 2014 from 2013, whereas available capital has moderately shrunk. Asset risk has remained fairly stable, as the insurer continues to focus on the deposits and bonds of local  banks, predominantly rated in speculative grade.

On the positive side, Fitch notes reduced uncertainty from the employers’ liability  litigation and the related pressure of the reserving risk on the insurer’s risk- adjusted capital position. Based on the continuing strong growth of NWP at 51% and a non-annualised ROAE at minus 17% in 4M15, Fitch considers any significant strengthening of Alliance Polis’s Prism capital score as unlikely in 2015 even with the planned KZT1bn capital injection in 2H15.

RATING SENSITIVITIES

Key rating triggers that could result in an upgrade include an improvement in the  insurer’s operating performance to at least a positive net profit, with continuing balanced premium growth and a healthier underwriting result, and no weakening in the risk-adjusted capital position from the current level, as assessed by Fitch’s  capital model.

The ratings could be downgraded if Fitch’s view of the shareholder’s continuing willingness to support the company changes and capital continues to be rapidly eroded.

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