LONDON--(BUSINESS WIRE)--AM Best has removed from under review with negative implications and affirmed the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” of Halyk-Kazakhinstrakh, Insurance Subsidiary Company of Halyk Bank of Kazakhstan, JSC (Kazakhinstrakh) (Kazakhstan). Kazakhinstrakh is a wholly owned subsidiary of JSC Halyk Bank (Halyk Bank), a leading retail bank in Kazakhstan. The outlook assigned to these Credit Ratings (ratings) is negative.
These rating actions follow the completion of Kazakhinstrakh’s merger with its sister insurer, JSC IC Kazkommerts-Policy (Kazkommerts-Policy), in August 2018, and the conclusion of AM Best’s assessment of the merger’s impact on the company’s credit fundamentals.
The ratings reflect Kazakhinstrakh’s balance sheet strength, which AM Best categorises as very strong, as well as its strong operating performance, limited business profile and marginal enterprise risk management.
The negative outlooks reflect some weakening in the company’s balance sheet strength and potential for deterioration in underwriting performance following the merger. Kazakhinstrakh’s balance sheet strength is underpinned by risk-adjusted capitalisation that is categorised as strongest, as measured by Best’s Capital Adequacy Ratio (BCAR), and a relatively conservative investment portfolio with good liquidity. However, post-merger risk-adjusted capitalisation has deteriorated, due to large dividend payments and an increase in exposure to catastrophe losses. The company’s dividend policy has become more onerous in recent years, which, combined with a relatively basic capital management approach, creates uncertainty as to the ability of the company to maintain risk-adjusted capitalisation at current levels.
Operating performance has been strong, driven by good underwriting performance and healthy investment returns. However, technical results have deteriorated noticeably in recent years, demonstrated by a five-year weighted average combined ratio of 93% between 2013 and 2017, compared to 80% between 2008 and 2012, due to difficult market conditions, as well as under-reserving for its workers’ compensation business in earlier years and the requirement for subsequent reserve strengthening. Overall profitability has been good, demonstrated by a five-year weighted average return on capital of 16% over the period 2013-2017. However, this is largely a result of high investment returns, which reflect the inflationary environment in Kazakhstan in recent years.
In 2018, underwriting profitability is expected to be marginal, due to one-off accounting restatements and a rise in the expense ratio associated with the absorption of Kazkommerts-Policy’s portfolio. Prospective performance will be subject to successful execution of the merger and the company’s ability to implement planned expense savings.
Kazakhinstrakh is one of the established leaders in the Kazakh non-life market, ranking second as measured by gross written premiums in the first 10 months of 2018. As a result of the merger, the company expects to almost double its premium base and is targeting a 20% market share in 2019 on a gross basis. This could improve its competitive position, but is subject to execution risk, particularly in view of the high competition and regulatory risk in the Kazakh non-life market.
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