OREANDA-NEWS. August 27, 2013. Standard & Poor's Ratings Services raised its insurer financial strength and counterparty credit ratings on Kazakhstan-based insurer and reinsurer Eurasia Insurance Co. to 'BB+' from 'BB'. The outlook is stable.

At the same time, we raised our Kazakhstan national scale rating on the company to 'kzAA-' from 'kzA'.

Rationale

The upgrade results from the application of our revised insurance criteria. The ratings predominantly reflect our view of Eurasia's business risk profile as fair and its financial risk profile as less than adequate. Our assessment of the financial risk profile stems from Eurasia's high risk profile and less than adequate average credit quality of its investments. We derive our 'bb+' anchor for Eurasia from the combination of these factors. Eurasia's adequate enterprise risk management (ERM) and satisfactory management and governance are neutral factors for the ratings.

Eurasia is part of Eurasian Financial Co., and an affiliate of Eurasian Natural Resources Corp. PLC, a diverse global natural resources group. Other group members include Eurasia's former owner and now sister company, JSC Eurasian Bank, and asset-management company Eurasian Capital. Our ratings on Eurasia reflect its stand-alone creditworthiness, given the current group structure, and do not explicitly take into account further support from the group or its shareholders. In our view, in Kazakhstan the group's possible withdrawal of capital from Eurasia would likely prove difficult and time consuming.

Overall, in our opinion, Eurasia faces moderate industry and country risk because it operates mainly in Kazakhstan. However we note that, compared with peers, Eurasia is reasonably diversified internationally. Currently, about 36% of its gross premium written (GPW) relates to international business, up from about 30% in 2011. In addition to its main market, the Commonwealth of Independent States, Eurasia writes inward reinsurance in about 70 countries. Our assessment of industry and country risk is unlikely to change during 2013–2015 in light of Eurasia's leading positions in Kazakhstan and diversification primarily into developing markets that we consider to generally pose intermediate to moderate industry and country risks.

Eurasia has an adequate competitive position in our view, mainly stemming from its geographic diversity and leading positions in Kazakhstan. With GPW of Kazakhstani tenge (KZT) 27 billion (about \\$180 million) in 2012, or 11.4% of the market, Eurasia maintained a diverse portfolio of direct insurance and inward reinsurance business. It is the leading reinsurer in Kazakhstan with a 49% market share that is likely to increase. In 2012, the return on revenue and return on total capital were moderate at 16% and 9% respectively, compared with strong five-year average results of 48% and 20%. Negative underwriting results stemmed from large losses in 2012. We don't expect Eurasia's operating performance to weaken in 2013-2015, assuming no further large losses. In our base-case scenario, we estimate that Eurasia's GPW will increase by about 15%, mainly from inward reinsurance business. In addition, we anticipate that Eurasia will strengthen its position in reinsurance, which would make up at least 40% of total premiums.

In our opinion, Eurasia has very strong capital and earnings, which we anticipate will continue in our base case. This reflects Eurasia's extremely strong risk-based capital adequacy ratio, slightly offset by the moderate size of capital (about USD350 million in 2012) compared with larger international peers'. However, Eurasia's share capital represented 43% of the Kazakh industry aggregate. Following regulatory changes aimed at increasing risk retention in Kazakhstan, we expect Eurasia to be offered more domestic reinsurance business due to its capitalization and brand, which should increase GPW. But we believe Eurasia will not significantly increase its retention of catastrophe risk, in particular, related to earthquakes, to which parts of Kazakhstan are exposed. In our base case, we expect the capital adequacy ratio to stay extremely strong, considering Eurasia's current capitalization.

We assume that Eurasia will report net income of at least KZT8 billion-KZT9 billion (about USD 53 million- USD 60 million) annually over 2013-2015, compared with KZT6.9 billion annually over the past five years. We expect underwriting results will become the chief contributor to earnings, with the net combined (loss and expense) ratio at about 85%, absent large losses. We expect investment results to be slightly higher than last year's, at about KZT5.7 billion, fueled by stable fixed-income investments.

In our view, Eurasia's risk position reflects high risk, considering high foreign exchange risk and investment concentration in the banking sector. The main constraint is the overall credit quality of Eurasia's investments, which carry an average rating of 'BB'. In addition, currency risk can be quite acute, since about 43% of invested assets are denominated in foreign currency.

Eurasia has adequate financial flexibility, in our view. Sound retained earnings and an implicit commitment of support from the shareholders are likely to cover the company's only modest needs. After several years of not paying dividends, Eurasia now intends to distribute approximately KZT6.5 billion (about USD 43 million) of its 2012 profits to shareholders. However, we regard the core shareholders' plan to reinvest about 38% of this amount in the company's share capital as positive. In view of Eurasia's recent history of capitalizing earnings, we believe the shareholders would provide additional capital if necessary. However, given Eurasia's sound operating results and current capitalization, it does not currently require additional support from the shareholders, in our view. We also expect Eurasia's retained earnings to remain sufficient to finance new business growth.

Eurasia's ERM and management and governance practices are neutral to the ratings. Our assessment of ERM as adequate reflects our view of the company's established risk management culture and risk controls. Emerging-risk controls and strategic risk management are becoming more important due to the increasing complexity of the risks that Eurasia underwrites and its exposure to catastrophes, namely earthquakes in the Almaty region.

Eurasia's management and governance are satisfactory in our opinion. Eurasia's management has displayed a clear strategy of developing local and international business, while preserving the risk balance in different countries and regions. The management team is stable and experienced, and we believe it capable of achieving the company's medium-term targets. In our view, Eurasia's management has displayed a clear focus on steady growth over the next several years, with profitability as the key goal.

We regard Eurasia's liquidity as exceptional, reflecting the liquid investment portfolio. The portfolio, totaling KZT68 billion (about USD 456 million) was invested in bonds (86%) and cash and cash equivalents (13%) as of Dec. 31, 2012; the share of equities was minor at 1%. Eurasia has historically reported positive cash flow from its insurance operations, and we expect this to continue.

Outlook

The stable outlook reflects our view that Eurasia will preserve its adequate competitive position and maintain very strong capital and earnings over the next two years.

We might lower the ratings if, contrary to our expectations:

The company's competitive standing weakened, due to a significant decline in premiums over the next two years, putting it at risk of losing its leading market share;

The average credit quality of Eurasia's investments fell to 'B' or lower;

Future dividend payments eroded capitalization, limiting the company's growth prospects.

A positive rating action is unlikely over the next two years unless the average credit quality of Eurasia's investments improves to 'BBB' or higher, all other factors remaining unchanged.