S&P: PASHA Insurance will maintain stable performance in 2020

-S&P Global Ratings today lowered its long-term insurer financial strength and issuer credit ratings on Azerbaijan-based PASHA Insurance OJSC to 'BB' from 'BB+.' The outlook is stable.

According to agency analysts, the ratings lowered because they expect higher dividend payments than awaited will constrain the insurer's capitalization and financial risk profile in the next two years. Also, the challenging macroeconomic environment may put additional pressure on the insurer's asset quality.

"We expect that PASHA Insurance's capitalization, based on our capital model, will be less solid in the next two years than we expected previously. Although we assumed that the insurer's dividend payout would be about 50% of net income in 2020-2022, it paid 100% in 2020 and plans to do the same in 2021 before reducing payments to 80% of net income in 2022. The new dividend policy will weigh on our forecast capital adequacy, which will likely not strengthen in the next two years, contrary to our previous expectations," the statement reads.

"We have also revised our GDP forecast for Azerbaijan and now expect the country's real GDP will shrink by 6.9% in 2020 before rebounding to about 3.0% growth in 2021. Increased military tensions could compound pandemic- and oil-price-related downside risks to growth, weighing on business confidence and household consumption. However, we expect that PASHA Insurance's gross premiums written (GPW) will remain flat in 2020 because the insurer's corporate clientele mainly consists of the largest Azerbaijani enterprises, including State Oil Company of the Azerbaijan Republic, which we believe will continue to roll over their insurance contracts. We forecast that PASHA Insurance's GPW will increase by about 5% in 2021-2022 as the economic situation stabilizes, and the company proceeds with its strategy of increasing penetration into the retail segment. We forecast that its operating performance will remain favorable in the next two years, with a combined ratio of 75%-80% (77% over the first eight months of 2020). PASHA Insurance's market share by GPW in Azerbaijan's property/casualty (P/C) insurance sector reached 41% in first-half 2020. We expect that the challenging economic environment may weigh on PASHA Insurance's asset quality because most of its investment portfolio is held with Azerbaijani issuers.

We forecast that the weighted average credit quality of PASHA Insurance's investments will be in the 'BB' range and consequently assess its risk exposure as high. We expect that the insurer's funding profile will remain neutral. In our forecast, debt leverage will moderately rise in the next two years, with financial leverage not exceeding 10%. The stable outlook reflects our expectation that PASHA Insurance will maintain strong operating performance in the next 12 months, supported by both underwriting and investment results, despite the challenging economic environment in Azerbaijan. We expect the company to keep its leading positions in the P/C insurance segment in Azerbaijan and maintain its current capitalization level. We view a positive rating action as remote in the next 12 months, taking into account the planned high dividend payouts in the next two years, the concentration of the company's insurance and investment activities in Azerbaijan, and the challenging economic environment in the country."