Fitch Affirms Kafolat’s IFS at ‘BB-’

Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based Kafolat Insurance Company JSC’s Insurer Financial Strength (IFS) Rating at ‘BB-’. The Outlook is Stable.

The rating reflects Kafolat’s majority state ownership, favourable business profile, relative resilience of its financial performance to the negative implications of the coronavirus pandemic and a supportive capital position. These strengths are partly offset by high investment risks.

The Uzbek state and state-owned companies hold a combined 68% interest in Kafolat, with the Agency for Management of State Assets of Uzbekistan holding 41.5% at end-9M20. In June 2020, CSJC Genesis Innovation, a private local IT provider, acquired a 25% stake in Kafolat. We believe that Kafolat’s ties with the state are unaffected by this sale, and continue to factor state ownership into Kafolat’s rating.

Fitch views the company’s investment risk as high. Kafolat is exposed to significant equity instruments with significant concentrations by issuer. The equity portfolio accounted for 55% of the consolidated investment portfolio at end-2019. The balance represented the fixed-income instruments in the form of bank deposits, which are reasonably well diversified and mainly placed with state-owned banks. Fitch notes that Kafolat’s ability to improve diversification is constrained by the narrowness of the local investment market.

Fitch ranks Kafolat’s overall business profile as ‘Favourable’ compared with all other Uzbek insurers, reflecting the company’s strong competitive positioning and business line diversification, including a sizeable life subsidiary. Kafolat is the fourth-largest composite insurer in Uzbekistan, with a 9% market share by gross written premiums (GWP) in 2019 (2018: 7%).

In its regulatory 9M20 standalone reporting, Kafolat demonstrated resilient financial performance amid coronavirus-related lockdowns, with non-life GWP declining only by 5% compared with 9M19. The drop was mainly due to financial risks insurance, which was affected by the non-renewal of a single large contract. The share of property and casualty insurance increased to 52% of total GWP in 9M20 compared with 37% in 9M19.

Kafolat Hayot’s top line performance also remained sound, with the GWP declined in 2Q20 and in 3Q20 by 7% and by 17% after significant growth in 1Q20. The latter resulted in a somewhat resilient top-line result in 9M20, reflected in a modest decline of 1% compared with 9M19, based on standalone regulatory reporting.

Based on 2019 consolidated IFRS accounts, Kafolat remained profitable, with net income reaching UZS10.6 billion, compared with UZS5.3 billion in 2018. The positive net result was fully driven by a strong investment component, which fully offset the negative underwriting performance in non-life and life segments. Kafolat’s combined ratio remained high at 106% in 2019 compared with 115% in 2018. The net result remained positive in 9M20 based on regulatory reporting, with net income totaling UZS7.4 billion, in line with UZS7.9 billion in 9M19. The net result was mainly supported by an improving non-life underwriting result as measured by combined ratio of 91%.

The insurer complied with solvency requirements, with a Solvency I-like margin of 224% at end-2019 and of 218% at end-9M20. From a risk-adjusted capital perspective, Fitch scored Kafolat as ‘Adequate’ as measured by the agency’s Prism factor-based capital model at end-2019. However, this score does not consider any capital charges for catastrophe risk exposures, which could otherwise weaken the Prism score. 

Kafolat’s capital position remains exposed to any potential revaluation of non-tradeable equity investments and tangible assets on its balance sheet. Kafolat recorded a UZS55 billion positive revaluation, which formed 38% of its IFRS-based capital at end-2019.