Fitch Ratings has assigned Kazakhstan-based Kompetenz Joint Stock Company (Kompetenz) an Insurer Financial Strength (IFS) rating of ‘B’ and a National IFS rating of ‘BB(kaz)’. The Outlooks are Stable.
The ratings reflect Kompetenz’s volatile underwriting performance, limited financial flexibility, (as it is privately owned by an individual) its relatively weak but new franchise in the Kazakh insurance market and the significant concentration risk in its insurance portfolio. Positively, the ratings reflect the solid quality of its investment portfolio and good capitalisation both on a risk-adjusted and regulatory basis, and its adequate reinsurance programme.
Kompetenz is privately owned, as a result of a management buy-out from Allianz SE (IFS: ‘AA-‘/Stable), the company’s previous owner, in Q411. 100% of the voting shares belong to Zhanar Kalieva, executive chairperson, who had been Kompetenz CEO for the past three years.
Kompetenz’s gross written premium declined by 49% in 2011. The key reason for this was the cancellation of a contract with Agip (a subsidiary of Italian oil company ENI ), which had formed a substantial proportion of Kompetenz’s premium in the past five years. Fitch understands that this decision was the result of a change in Allianz SE’s risk appetite in the region. Premium volumes continued to fall in H112 and, compared to H111, decreased by 31% on a net basis. Fitch notes that declining business volumes could indicate difficulties with the acquisition of new business, as well as the loss of premium reflecting the transfer of the obligatory employer’s liability insurance class to life insurance companies. Moreover, the retail market in Kazakhstan where Kompetenz targets growth is highly competitive.
There is significant concentration risk in the insurance portfolio. As at end-Q212, premiums were concentrated with a 49% contribution from one contract with a major oil services company. This concentration risk is partly offset by the solid credit quality of the reinsurer to which Kompetenz cedes a material proportion of this risk under a facultative arrangement.
Kompetenz (known as JSC Allianz Kazakhstan at that time) experienced negative underwriting performance in 2008 and 2009, when the combined ratio surged to 113.5% and 154.4% respectively, as a result of high expenses (2008: 70.4% of net premium written; 2009: 70.9%) and a high loss ratio (45.9% in 2009). This was largely explained by the inflexible remuneration system operated by the company at that time, investment in distribution, and reserve strengthening in respect of obligatory employer’s liability insurance. Kompetenz managed to stabilise its expenses in 2011, returning a profitable combined ratio at 77.5%. However, Fitch believes that containing expenses and remaining profitable throughout the planned expansion into the retail market could prove challenging.
Kompetenz has a conservative investment strategy, with investments in bonds accounting for 90% of total invested assets at end-2011. Positively, Kompetenz decreased the proportion of equities in its portfolio to 1% at end-2011 from 7% at end-2010. The portfolio is of a relatively high quality, when viewed from a local perspective, with assets of sub-investment-grade issuers accounting for only 4% of the total at end-2011.
Fitch believes that Kompetenz is well capitalised for its rating level. However, the regulatory solvency margin tends to be volatile and declined to relatively low levels in Q111 and Q112.
The ratings could be upgraded if Kompetenz proves its ability to grow the business franchise while maintaining an adequate financial profile (i.e. combined ratio below 100%) and capitalisation (solvency margin well above 100%).
The ratings could be downgraded if Kompetenz’s regulatory solvency margin structurally weakens to below 100% triggering regulatory intervention. Any indication of a reduction in the shareholder’s willingness to support the company would also be viewed negatively.
Kompetenz is a non-life insurance company, headquartered in Almaty, Kazakhstan. It wrote KZT3.9bn of GWP in 2011 and had gross assets of KZT4.0bn at FYE11.
Article sourced from Reuters