Best’s News & Research Service - July 29, 2016 12:00 PM (EDT)
A.M. Best Assigns Ratings to JSC Salem Insurance Company
- July 29, 2016 12:00 PM (EDT)
London //BestWire// - A.M. Best has assigned a financial strength rating of C++ (Marginal) and an issuer credit rating of “b” to JSC Salem Insurance Company (Salem) (Kazakhstan). The outlook assigned to each rating is stable.
The ratings reflect Salem’s developing business profile, weak operating results and thin level of risk-adjusted capitalisation. The ratings also consider Salem’s exposure to the heightened country risk within its domestic market of Kazakhstan.
Salem is a non-life insurer that reported gross written premium of KZT 6.0 billion (approximately USD 17.4 million) for the six months ending 1 July 2016, which represented approximately 3% of market premium. Following the changes to the management and shareholder structure in 2015, Salem is operating under a new strategy that is focused on developing its retail portfolio, with the aim to reduce the reliance on the expensive agency and broker route to the market and develop a larger direct sales channel. The company has grown rapidly, ranking 10th at 1 June 2016 (up from 15th in 2015). The Kazakh insurance sector consists of a total of 33 non-life and life participants. Salem’s rapid expansion creates uncertainty regarding the quality of risks written and impact on the company’s prospective performance, given the softened pricing environment and intense competitive conditions of the Kazakh market.
Salem’s operating earnings are weak and subject to volatility, mainly due to the wide variation in its technical results, as per the combined ratio of between 103% and 189% reported over the past five years. Performance is constrained by its high expenses, largely owing to the company’s substantial investments in infrastructure to support its expansion. Salem has yet to achieve the necessary critical mass to support its technical profitability. Salem is also growing its motor third-party liability (MTPL) portfolio; however, the performance of this class of business is diminishing as competition intensifies. The MTPL portfolio accounts for 29% of gross written premiums in 2015.
Salem’s risk-adjusted capitalisation is maintained at a thin level, owing to the rapid growth in premiums written. Additionally, retained losses have eroded the company’s shareholder equity in recent years. However, Salem’s shareholders have demonstrated a willingness to provide financial support through a KZT 240 million capital injection in 2016, which has increased the regulatory solvency margin to 1.25 at 1 July 2016 from 1.01 in April 2016. Nonetheless, A.M. Best expects Salem’s risk-adjusted capitalisation to remain at a marginal level underpinned by an inadequate capital management strategy.
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.
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