CI Ratings: Outlook for Two Iranian Insurance Firms Positive

Capital Intelligence Ratings, the international credit rating agency, has released its ratings for two Iranian private insurance firms, revising one insurer’s outlook to “positive” and giving a first-time rating to another.

The firm announced that it has assigned Long- and Short-Term Insurer Financial Strength Ratings of ‘BB-’ and ‘B’, respectively, to Parsian Insurance Company .

CI Ratings has also assigned Long- and Short-Term National Scale Ratings of ‘irAA-’ and ‘irA1’, respectively. The outlook for the Long-Term IFSR and the National Scale Rating is ‘Stable’.

The first-time ratings reflect Parsian’s comfortable top-five market position, based on sound management and strategies leading to a sustainable business model and sound profitability. In line with the industry, the company is significantly relying on motor business but its focus on commercial clients provides the company with a competitive edge, CI Ratings reported.

Additionally, the company offers appropriate insurance products, good services and a favorable market reputation.

Parsian’s current solvency position of ‘1’ is at the highest regulatory level and is supportive of current business volumes.

CI Ratings expects Parsian to continue to demonstrate strong and above market growth and expand its market share, but also build and attract capital to fund this growth.

Parsian is considered a leader in terms of profitability, especially its core insurance underwriting profitability (including administrative expenses but excluding investment results), which is regarded a relative strength even after including investment income.

However, in view of a very competitive environment, Parsian needs to continue to demonstrate cautious underwriting and competitive behavior in order to safeguard this very important managerial asset.

Parsian’s ratings are significantly influenced by a very challenging operating environment, reflecting structural weaknesses in the economy and the political and institutional framework, as well as a complex geopolitical situation. The insurer, nevertheless, seems well-positioned to benefit in the long run from the gradually more positive operating environment following the lifting of economic and financial sanctions and the reelection of the reform-oriented President Hassan Rouhani.

In the view of CI Ratings, the Iranian insurance industry is still at an underdeveloped stage, characterized by low insurance density and penetration, a very high reliance on the very competitive motor business, with generally unsatisfactory underwriting results, and often only moderate capitalization levels, with premium growth often exceeding capital generation capacity.

Additionally, there is a need for a more risk-based supervision, as well as improved financial disclosure and transparency.

  Razi Outlook Revision

CI Ratings has also revised the outlook to ‘Positive’ from ‘Stable’ for the Long-Term IFSR for Razi Insurance Company based in Tehran.

At the same time, the company’s Long- and Short-Term IFSRs were affirmed at ‘B+’ and ‘B’, respectively.

The rating mainly reflects Razi’s improved market position as well as the company’s reduced investment concentration risk.

CI Ratings could consider a further positive change in the ratings, should Razi sustain this progress, demonstrate further improved underwriting results and sufficient financial flexibility to attract the capital necessary to fund the planned high growth and successfully reduce its substantial premium receivables.

Higher insurance demand and improved operating performance caused by significant improvements in the operating environment are also additional supporting factors.

CI Ratings expects Razi to benefit from potential economic improvements that lead to higher insurance demand.

In fact, Razi can capitalize on its improving position and a relatively low-complexity business model, based on its focus on appropriate retail insurance products, good services and sound market reputation.

The company’s continued growth story starts to show positive results in terms of economies of scale, including improved cost efficiency. A constraining factor remains Razi’s over-proportional exposure to the very competitive motor third-party liability business (or personal auto policies).  

Although recently improved, the concentration of Razi’s investments on banks and real estate continues to be a constraining factor. In the view of CI Ratings, this partially reflects the lack of depth, breadth and liquidity of local capital markets, but also the company’s desire to generate higher returns to compensate for weak underwriting profitability.

About 56% of Razi’s investments (representing 65% of shareholders’ funds) at the end of the fiscal 2016 were short-term deposits with Iranian banks. Importantly, however, the significant concentration on a single obligor (Ayandeh Bank) has been reduced significantly in the course of 2017-18.

Furthermore, Razi’s investments in real estate (branches and project developments) were reduced significantly at the end of the fiscal 2016 through the sale of properties, but still represented 34% of the company’s investments.

Razi has recently decided to effect a significant capital increase by 3-5 trillion rials ($77.7 million-$129 million) in order to fund its ongoing growth while also supporting its current Level 1 regulatory solvency. However, in the view of CI Ratings, in light of Razi’s expected substantial growth and limited earnings retention capacity, the company will have to rely on regular capital increases.