Best’s News & Research Service - May 20, 2016 11:06 AM (EDT)
A.M. Best Removes From Under Review and Downgrades Ratings of Standard Insurance Company, JSC
- May 20, 2016 11:06 AM (EDT)
London //BestWire// - A.M. Best has removed from under review with negative implications and downgraded the financial strength rating to C++ (Marginal) from B- (Fair) and the issuer credit rating to “b+” from “bb-” of Standard Insurance Company, JSC (Standard) (Kazakhstan). The outlook assigned to each rating is stable.
In January 2016, Standard’s ratings were placed under review with negative implications following the announcement of its intention to absorb certain insurance portfolios of Alliance Polis Insurance Company, JSC (Alliance Polis). Alliance Polis is a non-life insurer operating in the local market.
After receiving policyholders’ consent in January 2016, Standard absorbed Alliance Polis’ insurance portfolio mainly consisting of compulsory motor third-party liability, property and compulsory workers’ compensation (reinsurance) business, with gross written premium (GWP) of KZT 1.9 billion (approximately USD 5.7 million). Standard reported GWP of KZT 4.6 billion (approximately USD 13.9 million) in 2015. Standard does not assume responsibility for policyholders’ obligations associated with the rest of Alliance Polis’ business, which have remained with Alliance Polis.
The downgrade of the ratings reflects A.M. Best’s expectation that Standard’s risk-adjusted capitalisation will decline materially in 2016, as a result of higher underwriting risk exposure following the portfolio transfer. The company’s capital management strategy incorporates a small capital buffer above regulatory solvency requirements to cushion against unexpected losses.
Additionally, uncertainty exists in respect of the successful integration of the absorbed portfolio into Standard’s operation. Although Standard’s expense ratio is expected to be distorted in 2016, benefiting from a material rise in premiums and reduction in some operating costs, Standard is likely to face challenges in achieving expense synergies, which are necessary to support longer-term profitability. This reflects the high acquisition costs associated with the domestic insurance market, where business tends to be sourced through intermediaries. Standard’s and Alliance Polis’ expansion has been characterised by high costs, as demonstrated by the average operating expense ratio of approximately 75% produced by both companies between 2012 and 2015.
This uncertainty is further compounded by the lack of success achieved to date with the execution of Standard’s business strategy post-change in its shareholder structure. In particular, the company’s plans to penetrate the bancassurance distribution channel and to develop certain niche offerings have not materialised, resulting in worse-than-expected technical results, due to expense pressures. Additionally, the impact of the weakened economic conditions and intensely competitive pressures of the domestic insurance sector increase retention risk associated with Standard’s new and existing client base.
The rating actions also reflect Standard’s under-developed risk management framework, specifically with regard to the monitoring of its risk accumulations within the earthquake-exposed areas of Kazakhstan. As a result, uncertainty exists as to the ability of Standard’s reinsurance programme to adequately protect the company against a catastrophic event. A.M. Best notes Standard’s relatively high net risk retention level under its catastrophe treaty, which represented approximately a quarter of the company’s shareholders’ funds as at March 2016.
Despite the above negative factors, Standard’s competitive position is expected to be much improved by the transaction in 2016, with the anticipated increase in GWP expected to raise the company’s market standing to within the top 15 in a market of 33 players (based on 2015’s rankings). This compares with the 21st ranking in the previous year.
This press release relates to rating(s) that have been published on A.M. Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best’s Recent Rating Activity web page.
A.M. Best is the world’s oldest and most authoritative insurance rating and information source.