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

The affirmation is based on Fitch’s current assessment of the impact of the coronavirus pandemic, including its economic impact, under a set of ratings assumptions described below. These assumptions were used by Fitch to develop pro-forma financial metrics for Kafolat that Fitch compared with both ratings guidelines defined in its criteria, and relative to previously established Rating Sensitivities for Kafolat.

Fitch’s pro-forma analysis indicates the high vulnerability of Kafolat’s risk-adjusted capital position to potential investment shocks, as measured by Fitch’s Prism factor-based capital model (FBM). However, Fitch believes that the government will be committed to support Kafolat as long as the insurer remains state-owned. Under Fitch’s pro-forma earnings stress tests, Kafolat demonstrated resilience to operational shocks and financial performance metrics are only marginally hit.

The affirmation takes into account state ownership, the insurer’s sound regulatory solvency position and the compliance of the insurer’s financial performance ratios with criteria benchmarks for the insurer’s rating after the pro-forma modelling.

Assumptions for Coronavirus Impact (Rating Case):

Fitch used the following key assumptions, which are designed to identify areas of vulnerability, in support of the pro-forma ratings analysis discussed above:

--Decline in key stock market indices by 35% relative to 1 January 2020.

--Increase in two-year cumulative high-yield bond default rate to 13%, applied to current non-investment grade assets, as well as 12% of ‘BBB’ assets.

--For the non-life and reinsurance sectors, a negative impact on the industry-level accident year loss ratio from COVID-19-related claims at 3.5pp, partially offset by a favourable impact from the auto line averaging 1.5pp.

The ratings remain sensitive to any material change in Fitch’s Rating Case assumptions with respect the coronavirus pandemic. Periodic updates to our assumptions are possible given the rapid pace of changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak. An indication of how ratings would be expected to be impacted under a set of Stress Case assumptions is included at the end of this section to help frame sensitivities to a severe downside scenario.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--A material adverse change in Fitch’s Ratings Assumptions with respect to the coronavirus impact.

--A one-notch downgrade of the Republic of Uzbekistan’s Long-Term Local-Currency IDR is likely to lead to a one-notch downgrade of Kafolat’s rating.

--Any significant change in the insurer’s relations with the government, resulted in weakening of the provided state support, is likely to lead to negative rating action.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Positive rating action would be prefaced by Fitch’s ability to reliably forecast the impact of the coronavirus pandemic on the financial profile of both the Uzbek insurance sector and Kafolat.

--A one-notch upgrade of Uzbekistan’s Long-Term Local-Currency IDR, which is likely to lead to a one-notch upgrade of Kafolat’s rating

--Fitch’s stress case assumes a 60% stock market decline, two-year cumulative high-yield bond default rate of 22%, high-yield bond spreads widening by 600bp, more prolonged declines in government rates, heightened pressure on capital-market access, an adverse non-life industry-level loss ratio impact of 7pp for COVID-19 claims partially offset by a favourable impact for motor of 2pp and a notch-lower sovereign rating.

--The implied rating impact under the Stress Case would be affirmation of the rating.