OREANDA-NEWS. Fitch Ratings has affirmed JSC Kazakhmys Insurance Company's (Kazakhmys Ins) Insurer Financial Strength (IFS) rating at 'B+' and its National IFS rating at 'BBB(kaz)'. The Outlooks are Stable.

KEY RATING DRIVERS
The ratings reflect Kazakhmys Ins's strong capital position for the rating level, its solid, albeit moderately declining, profitability and low average credit quality of the investment portfolio. The affirmation also reflects the challenges Kazakhmys Ins faces in relation to its planned growth strategy and high dependence on outwards reinsurance.

Kazakhmys Ins's shareholders injected KZT3.6bn to increase the insurer's share capital to KZT4.25bn in 2M16. There has been some redistribution between individual shareholders of the company, but their overall participation remained stable at 90.01%. Kazakhmys Corporation, the sole corporate shareholder and also a key customer of Kazakhmys Ins, has stayed at the current 9.99%. Kazakhmys Ins has indicated that strong top line growth, improved diversification of the portfolio and reduced utilisation of reinsurance are key aims of the planned capital increase in early 2016.

After the capital increase Kazakhmys Ins's investment strategy has remained mainly focused on fixed-income instruments (92% of the portfolio at end-February 2016), but of modest credit quality. 56% of the portfolio is USD-denominated instruments from local banks, mainly rated in the 'B' category. Fitch views this combination as particularly risky given the Kazakhstan macroeconomic context.

Based on unaudited 2015 results, the insurer reported strong premium growth of 74% on a gross basis and 48% on a net basis in 2015. The reinsurance utilisation ratio remained very high, with 84% of premiums ceded to reinsurers in 2015 (2014: 82%).

Fitch views the growth of the insurer's portfolio as undiversified. On a net basis, it was largely supported by the compulsory motor third party liability (MTPL) and, to a lesser extent, workers' compensation insurance written as inwards business from life insurers. As a result, the weight of MTPL in net written premiums grew to 52% in 2015 from 25% in 2014. This trend has continued in 2016 with this share growing to 74% in 2M16 from 49% in 2M15.

Kazakhmys Ins's net income improved to KZT921m in 2015 from KZT128m in 2014. This was achieved through KZT1.4bn FX gains on investments (2014: KZT0.1bn FX loss), which arose in the context of a severe devaluation of Kazakh tenge in 2015. In the absence of FX gains the insurer's net result weakened to a KZT66m loss in 2M16 (2M15: net profit of KZT307m).

The insurer's underwriting result was negative KZT209m in 2015 with the combined ratio at 106.7%, a moderate weakening from 105.1% in 2014. The loss ratio improved to 82.1% in 2015 from 97.8% in 2014 supported by reserve releases in significantly reduced accident insurance and to a smaller extent release of prior year reserves in property insurance. The combined ratio also benefited significantly from KZT850m subrogation income received on workers compensation insurance in 2015. Fitch has treated this item as an 'other underwriting income' component of the combined ratio.

Along with the sector-wide trend, Kazakhmys Ins is facing a deteriorating loss ratio on the compulsory MTPL line. The insurer's MTPL loss ratio weakened to 77% in 2015 from 56% in 2014. The subrogation income on MTPL remained stable in both years at 5% of the line's premiums earned. Fitch anticipates a further deterioration of the line's loss ratio in the Kazakh sector in 2016, which is a particular challenge for Kazakhmys Ins with its growing exposure to the line.

The insurer's commission ratio weakened but remained modest at 13.3% in 2015 from 7.5% in 2014. The administrative expense ratio remained burdensome at 46.7% in 2015 from 41.4% in 2014. Fitch believes that a reduction in the expense ratio is essential for a healthier underwriting result, particularly in the context of a major drop in commissions earned on outwards reinsurance in 2015.

Under Fitch's Prism factor-based capital model, Kazakhmys Ins's score was 'Strong' based on 2015 results. It weakened from 2014 due to the overlapping growth of net business volumes and investment portfolio relative to the available capital. The recent capital injection is likely to improve Kazakhmys Ins's score to 'Extremely Strong' in 2016, if the insurer does not face substantial net losses or major dividend outflow. The insurer's regulatory solvency margin strengthened to 388% at end-2M16 from 147% at end-2015. Kazakhmys Ins remains highly dependent on the quality of reinsurance purchased.

RATING SENSITIVITIES
The ratings could be upgraded if Kazakhmys Ins improves the average credit quality of its investment portfolio.

The ratings could also be upgraded if the company successfully executes its growth strategy, with a sustainable improvement of the underwriting profitability and diversification of the portfolio.

The ratings could be downgraded if Kazakhmys Ins depletes capital either due to underwriting or investment losses and demonstrates long-term inability to return to profitable underwriting.