Standard Life is a medium-sized Kazakhstani life insurance company with a market share of 6%, based on the total volume of written premiums (including occupational accidents insurance) in 2017. Globally, Standard Life is a small life insurance company with total assets of KZT22.7 billion as of the end of 2017 (approximately $ 70 million, based on current exchange rates).
Since 2015, the business structure of the company has shifted towards pension annuities, while the share of life insurance has declined. Pension annuities accounted for 73% of the net written premiums in 2017. However, the company is exposed to a significant risk of survival and interest rate risk in the annuity business, in particular, due to limited investment opportunities in the Kazakhstani capital markets. Fitch believes that a limited history of operations and repeated changes in composition of the management also increase the company's operational risk.
Fitch regards the regulatory capitalization of Standard Life as strong for the company's rating. Standard Life complies with solvency requirements: the solvency margin was 340% as of the end of 2017 (2016: 269%). Standard Life plans to maintain this figure at a level of 260% during 2018.
In 2016, Standard Life paid significant dividends, similar to the level of dividends paid in 2015 (in absolute terms). Dividends paid in 2016 amounted to 330% of net profit for the year, reflecting a significant amount of retained earnings for 2015, obtained from a one-time income from currency revaluation for that year. As far as Fitch knows, the shareholder takes into account the solvency margin index in the process of decisions making regarding repatriation of profits.
Standard Life invests mainly in deposits in Kazakhstani banks and, to a lesser extent, in fixed income securities. Bank deposits accounted for 87% of all investments as of the end of 2017, which corresponds to the level of 2016. Deposits are primarily in banks with ratings of “B” category.
Standard Life has a significant discrepancy in duration between assets and liabilities. The average duration of liabilities for pension annuities exceeds 10 years, while the duration of assets is less than one year. The company's ability to reduce this gap is limited by shortage of sufficiently long assets or instruments hedging in the Kazakhstan capital markets.
According to the national standards reporting for 2017, Standard Life had a net profit of KZT 766 million, which was due to positive technical results both in the segment of insurance other than life insurance and in the life insurance segment. In the segment of life insurance, a favorable moment for Standard Life was a strong investment income for pension annuities.
Standard Life lost sales channels of life insurance products after changing of the owner in 2017. Life insurance policies were distributed through the branches of the bank, which was previously the parent company structure, and they had a significant amount of company premiums (60% of the total volume of written premiums in 2016). This line of business also made a positive contribution to underwriting result in recent years. Termination of this business was followed by release of reserves in amount of KZT 405 million, which will not be repeated in 2018. As a result, Fitch expects that the underwriting result in 2018 may be weaker.
FACTORS THAT MAY INFLUENCE ON THE RATINGS IN THE FUTURE
The ratings may be lowered in the event of a significant weakening of Standard Life's capitalization or financial indicators, which may occur, for example, as a result of pre-reservation for annuity insurance or for insurance of employees against accidents at work. Both these types of insurance are significantly affected by any potential changes in regulatory requirements, in particular with regard to pricing, tariffs and reservations.
The ratings can be upgraded, if Standard Life continues to be profitable or reduces investment risk or inconsistency between duration of the assets and liabilities, or it will improve business diversification.
The issuer filed an appeal and provided Fitch with additional information in accordance with the agency's policy, which led to a rating action that differs from the original decision of the rating committee.
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