Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has assigned Uzbekistan-based Joint Stock Company Insurance Company SQB Insurance (SQB Insurance) an Insurer Financial Strength (IFS) Rating and Long-Term Issuer Default Rating (IDR) of ‘BB-’. The Outlooks are Stable.

SQB Insurance’s ratings mainly reflect its ownership by Uzbek Industrial and Construction Bank Joint-Stock Commercial Bank (UICB, Long-Term IDR: BB-/Stable). Its standalone credit quality reflects the insurer’s moderate company profile, weak capital position, adequate financial performance and high investment risk.

KEY RATING DRIVERS

Ownership Credit-Positive: SQB Insurance’s Long-Term IDR is aligned with UICB’s Long-Term IDR of ‘BB-’, its sole shareholder, to reflect Fitch’s view of the importance of SQB Insurance to UICB and strong integration of operations and management oversight. Moreover, our view is supported by our expectation that UICB will continue developing the insurance business, and provide support to SQB Insurance, if required.

This approach results in a two-notch uplift to SQB Insurance’s IFS Rating from Fitch’s assessment of SQB Insurance’s standalone credit quality of ‘b’.

Moderate Business Profile: Fitch ranks SQB Insurance’s business profile as moderate compared with other Uzbek insurance companies. This is mainly due to its moderate competitive positioning and diversification and less favourable business risk profile. SQB Insurance is a medium-sized non-life insurer, which wrote UZS72 billion of gross written premiums (GWP) in 2021, making it a top 13 non-life insurer in Uzbekistan with a market share of 2.4%. The insurer’s business mix is skewed to financial risks insurance (insuring bank loans), which accounted for 49% of GWP in 2021.

SQB Insurance was established by UICB in 2018 to form a financial group providing a full range of financial services to Uzbek customers. SQB Insurance relies heavily on business generated by UICB. However, SQB Insurance has increased the share of business sourced outside the banking group, which was reflected in a moderately declining share of UICB’s business in 9M22.

Weak Capital Position: Fitch assesses SQB Insurance’s capital position as weak. Its capital position, as measured by Fitch’s Prism Factor-Based Capital Model (FBM), scored below ‘Somewhat Weak’, with high asset risk contributing most to the insurer’s target capital. SQB Insurance’s regulatory solvency margin stood at 131% at end-2022, down from 190% at end-2021, following higher minimum capital requirements. We however expect SQB Insurance to maintain its regulatory capital position in excess of the minimum.

Adequate Financial Performance: Fitch views SQB Insurance’s earnings as adequate. Fitch calculated net income return-on-equity increased to 25% in 2022 from 20% in 2021, supported by strong investment result. However, underwriting result was negative, as reflected in a combined ratio of 115% in 2022. Overhead expenses weigh on the company’s profitability, as it is actively growing its business, while not having gained a sufficient premium base.

High Investment Risk: We assess SQB Insurance’s investment-and-asset risk as high. The insurer’s investment portfolio is dominated by fixed-income instruments in the form of bank deposits, mainly placed with state-owned and large private banks rated in ‘B’ and ‘BB’ rating categories. However, we view the asset portfolio as fairly well-diversified by issuer and very liquid. We also believe that, like for its local peers, SQB Insurance would find it difficult to achieve better diversification by type of instruments or issuer due to narrow investment opportunities available on the local capital market.