RPT-Correct: Fitch revises Alliance-Life's outlook to negative; affirms IFS at 'B'
(Repeat for additional subscribers)
Dec 3 (Reuters) - (The following statement was released by the rating agency)
This announcement corrects the version published on 29 November, which incorrectly stated the insurer's net loss in 9M13.
Fitch Ratings has revised the Outlooks on IC Alliance-Life Insurance JSC's (Alliance-Life) 'B' Insurer Financial Strength (IFS) rating and 'BB (kaz)' National IFS rating to Negative from Stable and affirmed the ratings.
KEY RATING DRIVERS
The Outlook revision reflects Alliance-Life's relatively high vulnerability to a marked deterioration in the regulatory environment in the Kazakh life insurance sector in 2013 and the resulting uncertainties in 2014. This deterioration has affected pension annuities and workers' compensation, both key lines for the insurer. If the regulatory environment does not improve, this could worsen Alliance-Life's already poor financial results. The insurer reported a net loss of KZT0.3bn in 9M13 caused by the poor performance of its annuity products and relatively high administrative expenses.
Significant favourable regulatory changes are currently under discussion and could be agreed as early as 1Q14. However, if these changes are not agreed and implemented, Fitch would expect Alliance-Life to remain unprofitable in 2014. This would mean that the insurer would be increasingly reliant on shareholder support, whereas the value of the company to the shareholder would be reducing due to the narrow business opportunities currently available for life insurers in Kazakhstan. To date Alliance-Life has benefited from strong shareholder support, reflected in equity injections of KZT1.5bn in 2012-9M13.
Since 2Q13 Kazakh life insurers have been unable to sell pension annuity products due to regulatory changes in the Kazakh government pension system. This line represented 69% of Alliance-Life's GWP in 2012 (6M13: 82%). Alliance-Life's second major line - workers' compensation - has been impacted by a significant increase in the sector's average loss ratio in recent years. Life insurers are currently expected to be able to re-enter the pension annuity segment in 2Q14.
Alliance-Life's portfolio is concentrated, with 77% of GWP in 9M13 accounting for annuity contracts. This concentration limits the insurer's risk diversification and makes it particularly exposed to longevity and interest rate risks inherent in annuity products. Fitch also views negatively the insurer's short track record of operations, scarce local mortality statistics and limited investment opportunities in Kazakhstan which expose the insurer to duration mismatch risk. Positively, however, Fitch notes that the insurer has a good liquidity position.
To compensate for the expected drop in premiums written in 2H13-1H14, the insurer is targeting relatively aggressive growth in the workers' compensation line as other life insurance segments remain relatively undeveloped in Kazakhstan. Fitch expects that growth in the workers' compensation business, in the current regulatory environment, is likely to be associated with an increase in the commission ratio for Alliance-Life's portfolio. On the other hand, the insurer's failure to restore business volumes would increase the relative pressure of administrative expenses on the underwriting result.
The loss ratio of the workers' compensation line has grown over the past few years with the inflow of critical illness claims and materially damaged capital of some players. The line accounted for 23% of Alliance-Life's GWP in 9M13 (2012: 17%) and produced moderately negative net income in this period. Fitch is concerned with the currently unfavourable claims regulation of the line and lack of statistics for the frequency and severity of claims at sector level, which limits the insurer's ability to project future claims development.
According to Fitch's own internal assessment, Alliance-Polis's risk-adjusted capital position is significantly exposed to longevity and interest-rate risks, although it remains in line with the current rating level. The statutory solvency margin stood at 111% at end-3Q13, just above the minimum of 100%.
The ratings could be downgraded if the regulatory environment fails to improve as expected. In particular, this could happen if the moratorium on pension annuity sales does not end in mid-2014.
Conversely, if the favourable changes in regulation under discussion are agreed and implemented, the Outlook could be revised to Stable. The Outlook could also be revised to Stable if Alliance-Life proves it is able to demonstrate resilient operating performance even in difficult and unfavourable conditions.
- Radar showed missing plane may have turned back: Malaysia military
- Missing Malaysian jet may have disintegrated in mid-air: source |
- Malaysian plane presumed crashed; questions over false IDs |
- Exclusive: Malaysia plane probe narrows on mid-air disintegration - source