CI Rates First Iranian Insurance Company

Capital Intelligence Ratings (CI), the international credit rating agency, announced this week  that it has assigned first-time Long- and Short-Term Insurer Financial Strength Ratings (IFSRs) of 'B+' and 'B', respectively, to Razi Insurance Company, based in Tehran, Iran.

The outlook for the IFSR is ‘Stable’. CI Ratings has also assigned to Razi initial Long- and Short-Term National Scale Ratings of ‘irA’ and 'irA2', respectively, also with a 'Stable' Outlook.

According to cpi.com, the ratings reflect Razi’s continuously improving competitive position and its low-complexity business model based on appropriate insurance products, good services, and sound market reputation. Razi’s current solvency level of ‘1’ is at the highest regulatory level and is supportive of current business volumes.

In CI’s view, the Iranian insurance industry is still at an underdeveloped stage, characterized by strong competition, unsatisfactory underwriting results, and moderate capitalization levels, with premium growth often exceeding capital generation capacity. Razi nevertheless seems well-positioned to benefit from increasing insurance penetration and density in Iran as the economy recovers, following the gradual lifting of international sanctions.

The company may, however, face challenges in generating the capital needed to meet its ambitious growth targets in light of the fierce competition in key business lines. In addition, its ability to raise substantial amounts of capital to support growth is likely to be constrained by the limited capacity and liquidity of the domestic equity market, combined with competing demand for capital resources from other local insurers, banks, and corporation.

The possibility of attracting a foreign insurance partner as an investor seems realistic given Razi’s strengths, but may take time to materialize.

As Razi’s insurance portfolio mainly consists of short-tail lines, premium and reserving risk is regarded as relatively low. However, Razi’s core underwriting profitability (including administrative expenses and excluding investment results) is regarded as weak. It is significantly impacted by the domestic competitive environment and the company’s still relatively small size, which does not yet allow Razi to benefit sufficiently from economies of scale.

Lacking Depth

A major constraining factor for the ratings is the concentration risk associated with Razi’s investments. This reflects the lack of depth, breadth, and liquidity of local capital markets, as well as the company’s desire to generate superior returns to compensate for weak underwriting profitability. About 56 % of Razi’s investments as of FYE 2016 were short-term time deposits with Iranian banks, the overwhelming majority of which were with one individual bank (Ayandeh Bank, unrated), thus representing a significant sector and single obligor concentration risk.

Furthermore, Razi’s investments in real estate (own branches and project development) were reduced during FYE 2016 through sales of properties, but still represented 34% of the company’s investments, and are budgeted to rise again. While real estate has traditionally been used as a hedge against inflation and in the past helped to bolster bottom-line profitability, such positive developments should not be taken for granted in an environment of declining inflation. Furthermore, it leaves Razi potentially vulnerable to volatility and liquidity in these markets.

Reacting to the news on Saturday Younes Mazloumi, chief executive of Razi Insurance, noted that the move would help his company expand into international markets.

“Our collaboration with top global insurance firms was disrupted during the sanctions and we had to limit ourselves to working with Asian insurers. Currently we have a bigger chance to clinch deals with top reinsurance firms,” risknews.ir quoted him as saying.

He said his company has already received Central Insurance company of Iran approval for accepting foreign reinsurance coverage.

He also noted that insurance firms’ capital adequacy and their capability of meeting their commitments are among the criterion for rating insurance firms.