Fitch affirms Kafolat at ‘B+’

Tashkent, Uzbekistan ( -- Fitch Ratings has affirmed Uzbekistan-based JSC Insurance Company Kafolat’s Insurer Financial Strength (IFS) Rating at ‘B+’. The Outlook is Stable.

The rating reflects the insurer’s sound business profile in the local non-life insurance sector, and its positive and diversified profitability. These strengths are offset by our assessment of the quality of Kafolat’s investment portfolio. The rating also takes into account Kafolat’s state ownership, the agency said.

Kafolat’s business profile benefits from the insurer’s ownership. The state has a 93% stake in Kafolat with the key shareholder being Ministry of Finance of Uzbekistan, which owns 66.51%. As part of a broad liberalisation, the Uzbek government had previously announced its intention to cede control in Kafolat. The privatisation now appears uncertain since Kafolat expects to receive a significant capital injection from its shareholders to support growth and finance the setting up of a life insurance subsidiary with share capital of UZS15 billion, the statement of Fitch reads.

Kafolat is one of four state-owned insurers in Uzbekistan. The other three are the local non-life leader with a focus on agriculture, a local export credit agency that also writes regular non-life insurance business, and its life subsidiary. Kafolat has not had a specific role, but was intended to write a broad range of traditional retail and commercial non-life insurance lines.

Fitch believes the insurer has strong capital relative to its business volumes, but still sees heightened risk related to the 30% weight of the revaluation reserve made for tangible assets in the capital, and a significant and concentrated exposure of the capital to equity investments. Kafolat has being paying modest dividends and capitalising the underwriting profit made on compulsory lines as part of the claims equalisation reserve. The insurer carries comfortable buffer in its regulatory capital, with a Solvency I margin of 293% at end-1H18.

Kafolat reported a strong net profit of UZS9.3 billion in 2017, in line with net profit of UZS9.1 billion in 2016, with a return on equity of 12% (2016: 16%). Robust underwriting results and a sizeable investment component contributed to the results. The combined ratio averaged 89% in 2014-2017.

Kafolat’s combination of low loss and commission ratios (the sum of the two averaged 38% in 2014-2017) suggests that the local competitive environment has been benign. This performance has been recorded across all main business lines, including compulsory motor third-party liability with a weight of 40% of gross written premiums (GWP) in 2017 and an average loss ratio of 16%, workers’ compensation insurance with a weight of 21% of GWP and an average loss ratio of 47%, and property insurance with a weight of 22% and average loss ratio of 11% in 2011-2017.

Kafolat’s loss ratio for the workers’ compensation line has substantially benefited from the transfer of claims to a special local reinsurance pool, in which Kafolat had a 50% share until March 2018. Due to the exit of some other local participants, Kafolat share in the pool grew to 90% by 3Q18. As a result, Fitch expects to see deterioration in the insurer’s loss ratio for the line. We also believe that the line may also have a reserving risk, as it carries a set of risks, including inflexible state-regulated pricing, absence of government guarantees, the long-tail nature of the risks and a simplified regulatory reserving approach.

The quality of Kafolat’s investment portfolio remains low, in our view. The portfolio has a high and growing exposure to equity instruments, representing 61% of total investments at end-2017. The fixed-income part of the insurer’s portfolio mainly comprises bank deposits, which are reasonably well diversified and mainly placed with state-owned banks. However, Kafolat’s ability to achieve better diversification is limited by the narrowness of the local investment market.

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