Fitch Ratings has assigned JBC Insurance Company NOMAD Insurance (NOMAD) an Insurer Financial Strength (IFS) rating of ‘B-‘ and a National IFS rating of ‘BB-(kaz)’. The Outlook for both ratings is Stable.
The ratings reflect challenges related to NOMAD’s rapid growth in the competitive Kazakh insurance sector, the insurer’s increasing concentration on one line – compulsory motor third party liability (MTPL), significantly dependent on the government regulation, and the weakening of NOMAD’s risk-adjusted capital position. The ratings also take into account the track record of stable, although moderately declining, underwriting profitability, the acceptable quality of the investment portfolio and NOMAD’s compliance with the local regulatory capital requirements.
Fitch is concerned about NOMAD’s aggressive growth, which depletes the insurer’s capital adequacy despite earnings generated by the underwriting activity. The compound average growth rate of NOMAD’s net premiums written (NPW) amounted to 65% in 2006-2010, with growth particularly accelerating in 2010 and H111. The key sources of NOMAD’s expansion have been compulsory MTPL and single large commercial property and casualty accounts.
According to the agency’s internal assessment, NOMAD’s current risk-adjusted capital position may be insufficient to support the insurer’s rapid growth in the medium term, should the growth rate remain the same. Fitch notes that NOMAD may need to either get external capital injections or slow the growth down to prevent further erosion of its risk-adjusted capital position. At the same time, the agency notes that NOMAD is owned by an individual shareholder and it is therefore difficult to assess the insurer’s financial flexibility.
Fitch notes that like many of its local peers, NOMAD faces deterioration of the underwriting result in 2011. This is to some extent fuelled by the changes in the reserving methodology prescribed by the regulator from 2011. Fitch also notes that NOMAD’s combined ratio has recently been pressured by the increasing loss activity in one of the insurer’s key lines – compulsory MTPL. This trend represents a concern for Fitch, particularly taking into account NOMAD’s aggressive growth in the segment. The agency understands that at present MTPL pricing in Kazakhstan is fully regulated by the government, which suggests that potential adjustment of the current inflated tariffs or their potential liberalisation in the medium term may have a major impact on NOMAD’s operations.
Fitch sees NOMAD’s high appetite for the market share in the MTPL segment as a major risk for the insurer. Since a significant increase of MTPL tariffs by the regulator in H207, NOMAD’s market share has grown to 15.5% in 5M11 from 1.6% in 2007 and the line’s weight in the insurer’s NPW to 47% from 3% in the same period. Fitch understands that this growth has taken place in a highly competitive environment, where the competition primarily evolved in the acquisition field. At the same time, the agency notes that to some extent, NOMAD’s growth has been supported by the insurer’s achievements in the sales process development and its IT support.
NOMAD has demonstrated strong operating performance since at least 2006 with underwriting operations being the key source of profit. The insurer’s investment income has also been positive, but less perceptible for the operating result.
NOMAD’s property and casualty portfolio has a number of significant concentrations with a few single large accounts forming a notable part of GPW in 2006-2010. The net exposure of the insurer’s portfolio to these accounts is considerably lower, as these risks are predominantly ceded to strong international reinsurers. Nevertheless, Fitch believes that reinsurance commissions received by NOMAD on these accounts have made a perceptible contribution to the insurer’s net underwriting result. The agency also understands that some of the major policies with low loss activity may not be renewed in future periods, which may significantly affect NOMAD’s overall underwriting performance. Therefore, the insurer is significantly exposed to risks of loss of large customers.
NOMAD’s investment portfolio is prudently structured with equity instruments accounting for less than 1% at end-5M11. At the same time, Fitch notes that the portfolio diversification by industry is low with 81% of investments concentrated in Kazakhstan’s banking sector. To some extent, this is explained by the relative narrowness of the Kazakh investment market. Fitch also notes that the credit quality of the insurer’s portfolio is moderate, which is a reflection of Kazakhstan’s country ceiling and strength of the local banking system.
Source : Fitch Ratings Press Release