Tashkent, Uzbekistan (UzDaily.com) —  Fitch Ratings has revised the outlook for Uzbekistan’s Kafolat insurance company from "Stable" to "Negative," while maintaining its financial strength rating (IFS) at "B+".

The main reason for the outlook change is the weakening of the company’s capital position, along with heightened business risks associated with increased exposure to the international inbound reinsurance market.

The rating reflects the company’s profitability volatility, as well as investment and asset risks, a significant portion of which is determined by the quality of its internal financial instruments.

The rapid growth in business volumes, combined with limited internal capitalization, has put pressure on Kafolat’s capital, reducing its adequacy from "adequate" according to Fitch’s Prism model at the end of 2022 to "somewhat weakened" by the end of 2023. This occurred despite a record net profit of 115 billion soums in 2023.

In the first quarter of 2024, the company came close to breaching its capital adequacy ratio, but shareholders injected 45 billion soums, which helped create an additional financial buffer.

Fitch forecasts that pressure on Kafolat’s capital will persist due to its ambitious growth strategy. Moreover, the high level of uncertainty related to its international reinsurance portfolio increases the likelihood of significant financial fluctuations. In case of losses in this segment, the company’s capital reserves may be insufficient to cover the losses. Risks include potential actual losses exceeding expectations, sharp economic downturns, or major catastrophic events.

Kafolat is actively developing its inbound reinsurance business through international brokers, focusing on property insurance in the U.S. Particular attention is being given to non-proportional reinsurance. Revenues from inbound reinsurance grew by 142% in 2023, accounting for 77% of total premiums in non-insurance lines.

However, Fitch notes that the risks associated with this direction remain insufficiently studied, which negatively affects the company’s credit profile. Despite geographical diversification, the high concentration of risks could lead to significant volatility in financial results.

Kafolat’s return on equity in 2023 was 76%, significantly higher than -3% in 2022 and the average 2% for the 2019-2022 period. Such fluctuations are explained by the instability of profitability in life insurance and non-insurance segments. The loss ratio ranged from 13% to 37% over the past five years, while customer acquisition expenses and administrative costs absorbed a significant portion of premiums.

The company’s financial results for 2023 were positively influenced by the sale of equity investments. However, Fitch points out that a significant portion of the profit is due to business growth based on insufficiently developed foundations, increasing the risk of financial instability.

Investment risks decreased after the sale of most equity assets in 2023. By the end of the year, Kafolat’s portfolio consisted mostly of bank deposits, making up 97% of assets placed in local state banks with maturities ranging from one to three years.

Nevertheless, Fitch acknowledges that the company may resume investments in equity instruments and bonds in the future, which are likely to have low credit quality due to the limited choice of financial instruments in the domestic market.

Kafolat faces significant risks through its property insurance reinsurance portfolio. As with many other local insurers, the company does not conduct internal modeling of the maximum possible loss and lacks adequate reinsurance coverage for such risks. The absence of an adequate assessment of these threats negatively impacts the company’s rating.