Fitch Affirms Centras’ IFS at ‘B’; Outlook secure

Fitch Ratings has been affirmed Kazakhstan-based Insurance Company Centras Insurance JSC’s (Centras) Insurer Financial Strength (IFS) Rating at ‘B’ and National IFS Rating at ‘BB+(kaz)’.

The Outlooks are stable.

The ratings reflect the insurer’s weak company profile and relatively high investment risks, which are partially offset by adequate capital position and profitable, albeit volatile, financial performance.

Key Rating Drivers

‘Less favourable’ Business Profile: Fitch’s assessement of Centras’ company profile is driven by less favorable competitive positioning and business risk profile and moderate diversification. Centras’s competitive positioning was broadly stable in 8M22 with a market share of 2.2%. On a gross basis, the company recorded modest revenue growth of 3%, with motor damage contributing the most.

Insurance Portfolio Acquisition Broadly Neutral: In November 2022Centras acquired the insurance portfolio of the non-life peer JSC Insurance Company Kommesk-Omir. Kommesk-Omir is a medium-sized motor insurer with a market share of 1.6% in the 8M22. Kommesk-Omir net technical transfer reserves of KZT6.8 billion. This was backed by liquid assets. We view this acquisition as broadly neutral to Centras’s company profile.

Exposed to Equity Instruments: Fitch views Centras’s investment risk is high due to historically prominent exposure to equity instruments in its investment portfolio. The share of equity holdings, recognized as available-for-sale (AFS) securities, increased to 82% of shareholders’ funds at end-2021 from 48% at end-2020. Due to weak capital market performance, the company reported significant revaluation losses of KZT1.3 billion on its AFS portfolio, recognized as the change in the revaluation reserve on its balance sheet, at end-9M22. As a result, shareholders’ funds at end-9M22 decreased by 15% compared with end-2021.

Adequate Capital Position: Centras’s capital position, as measured by Fitch’s Prism Factor-Based Model (FBM), was ‘Adequate’ at end-2021, in line with 2020. The target capital remained high due to elevated asset risks stemming from significant equity exposure . From a regulatory capital perspective, the insurer’s regulatory solvency margin dropped to 104% at end-4M22 from 253% at end-2021, mainly driven by lower equity market values. At the end of 9M22 it was restored to a more comfortable level of 120%.

We Centras’s Prism FBM post-acquisition capital position has been weakened due to a rise in target capital expectation relative to available capital, which remains broadly unchanged. We expect the insurer’s regulatory solvency margin to remain broadly stable and above the minimum required level.

Bottom Line Volatility Driven by Realised Gains/Losses: Centras’s profitability is volatile. The insurer reported a net profit of KZT256 million in 9M22 compared with KZT1.8 billion in 9M21. The reduction was mainly driven by realised capital losses stemming from the value reduction of the company’s fixed-income instruments following the increase of the base interest rate in Kazakhstan in. in April 2022. In contrast to 9M22, Centras recorded a strong net income of KZT2.2 billion and ROE of 28% in 2021. Net profit was supported by realised capital gains on its investments. KZT1.1 billion.

We expect the integration process related to the acquired portfolio of Kommesk-Omir to be broadly neutral for Centras’s financial performance, although there might be further increases in expenses.

RATING SENSITIVITIES

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

Positive developments from the successful integration of Kommesk-Omir’s insurance portfolio and subsequent positive implications for Centras’s business profile assessment while maintaining the capital position.

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

Substantial capital depletion, for example, as evidenced by a breach of prudential capital metrics.

Best/Worst Case Rating Scenario

International scale credit ratings of financial institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAAto ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg

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