OREANDA-NEWS. Fitch Ratings has affirmed Kazakhstan-based Kompetenz Joint Stock Company's (Kompetenz) Insurer Financial Strength (IFS) rating at 'B' and its National IFS rating at 'BB(kaz)'. The Outlooks are Stable.

KEY RATING DRIVERS
The ratings reflect Kompetenz's limited financial flexibility, continuing loss-making underwriting performance, a business strategy that Fitch believes is challenging to execute, and the moderate quality of its investment assets. However, the ratings also reflect the insurer's adequate capital position, and its more conservative investment strategy than local peers.

Fitch continues to see the operating environment as a difficult one in which to execute Kompetenz's growth strategy. This is because the company has neither an affiliation with a large local industrial group nor exclusive access to bancassurance distribution channels, both being common business models for insurers in Kazakhstan. At the same time, Fitch also believes that Kompetenz's financial flexibility is limited by the insurer being the main operating company of an individual shareholder.

Kompetenz encountered a stretched regulatory capital position and was below the minimum compliant 100% solvency margin from end-3Q14 till end-1Q15, due to negative operating cash flow and moderate growth of reserves in line with business volumes. The margin was restored to 101% at end-4M15 due to reserve release, which strengthened the available capital under the regulator's Solvency I-like formula.

Kompetenz reported a deterioration of its net loss to KZT379m in 2014 from KZT316m in 2013 (restated from KZT184m net loss in 2013 due to the write-off of KZT132m subrogation receivables). With its combined ratio at 159% in 2014 and 191% in 2013 (restated from 165% in 2013 due to the reduction of the subrogation income), the underwriting result remains the key factor behind the insurer's net losses.

In 4M15 Kompetenz's net profit improved to KZT148m from a net loss of KZT100m in 4M14, largely due to a significant release of loss reserves for the workers' compensation (WC) line. The combined ratio reduced to 79% in 4M15 from 210% in 4M14, additionally benefiting from reduced administrative expenses as net written premiums written (NWP) in 4M15 rose 176%. However, the recent growth has been fairly undiversified and has been mainly achieved through compulsory motor third-party liability insurance. This line accounted for 49% of NWP in 4M15, up from 17% in 2013 and in line with 51% in 2014.

Adverse loss reserve development for the WC line has been the key reason behind Kompetenz's poor underwriting results since 2012, when the insurer, as with other local non-life insurers, discontinued the line due to regulatory changes. The existing WC liabilities are being managed on a run-off basis. The long-tail nature of WC risks and a significant increase in claims frequency has affected most underwriters in the country over the last three years. The line contributed 55pp to Kompetenz's combined ratio of 191% in 2013 and 49pp to its 159% combined ratio in 2014.

In May 2015 Kazakhstan enforced the long-standing regulations on professional diseases, disability and WC insurance. The changes have been positive for the insurers exposed to WC insurance, as coverage will be reduced and a moderate release of the line's incurred-but-not-reported reserves is expected. According to Kompetenz's expectations, this release is likely to have a sustained modestly positive effect on the underwriting result. The reserve release should be confirmed at the next regular actuarial review.

From a Prism factor-based capital model perspective, Kompetenz's risk-adjusted capital score remains below 'somewhat weak' based on 2014 results. It demonstrates a moderately negative trend compared with 2013. Target capital has increased, driven by 81% growth of NWP in 2014, while available capital has shrunk. Asset risk has remained fairly stable, as the insurer continues to focus on fixed-income instruments, predominantly rated in speculative grade. On the positive side, Fitch notes reduced uncertainty from the employers' liability reserving risk on the insurer's risk-adjusted capital position.

Based on the continuing strong growth of NWP and a modest non-annualised return on adjusted equity of 9% in 4M15, Fitch believes a significant strengthening of Kompetenz's Prism capital score is unlikely in 2015.

RATING SENSITIVITIES
Key rating triggers that could result in an upgrade include a sustained improvement in the insurer's net result to positive territory, diversified premium growth and no further weakening of its Prism factor-based capital model score.

The ratings could be downgraded if the insurer's regulatory solvency margin remains exposed to non-compliance risks on a prolonged basis and fails to improve its operating performance on a sustainable basis.