Fitch upgrades Insurance Company Amanat national insurer financial strength rating to "BB+(kaz)", outlook stable

/Fitch Ratings, Moscow, February 29, 16, KASE heading/ – Fitch Ratings has upgraded Kazakhstan-based AMANAT Insurance's (AMANAT) National Insurer Financial Strength (IFS) rating to 'BB+(kaz)' from 'BB(kaz)' and affirmed its IFS at 'B'. The Outlooks are Stable. KEY RATING DRIVERS The upgrade of the National IFS reflects AMANAT's improved regulatory capital position after a capital injection and substantial strengthening of the net profit in 2015. AMANAT's shareholder injected KZT560m into the company in 2015 to support the regulatory solvency margin. The margin had fallen to a non-compliant 93% in April 2015 due to a sharp growth of payables for facultative reinsurance placements and consequent increase of required capital under the local regulatory solvency formula. The margin returned to compliant levels throughout the rest of 2015 and was 120% at end-1M16. The ratings continue to reflect AMANAT's negative underwriting result, its relatively weak capital position and the moderate quality of its investment assets. The ratings also take into account the track record of moderate capital support from the shareholder. Based on unaudited 2015 results, AMANAT's net income improved to KZT944m in 2015 from a net loss of KZT1,060m in 2014. This improvement was underpinned by KZT1.5bn FX gains on investments (2014: KZT0.2bn) and, to a smaller extent, a reduced loss on the underwriting side. The FX gains arose in the context of a severe devaluation of the Kazakh tenge in 2015. AMANAT's combined ratio improved to 111.1% in 2015 from 134.0% in 2014 mainly due to a decrease of the loss ratio to 49.8% from 57.7% and the administrative expenses ratio to 49.3% from 56.9%. The commission ratio also made a moderate positive contribution, improving by 3 percentage points. Fitch believes that a further reduction in the expense ratio is essential for a healthier underwriting result. Premiums written by AMANAT grew 36% on both a gross and net basis in 2015, with commercial property and liability insurance being key drivers of growth. These two lines demonstrated rather low loss ratios in 2015 but required intense reinsurance protection with 73% of gross written premiums ceded to reinsurers. This reinsurance protection has not yet proved its efficiency when measured as the reinsurance effect on the net loss ratio since at least 2010, but appears necessary given the scale of single risks relative to AMANAT's net retention. Commission income on reinsurance has made only a modest contribution to the insurer's underwriting result since at least 2010. The panel of reinsurers in 2015 contained one significant concentration with a state-owned reinsurer in an emerging market, whereas the rest was mostly placed with strong international reinsurers. On the retail side, AMANAT reported a 14% decline in premiums for compulsory motor third party liability insurance and 25% growth for the motor damage line. Both motor lines demonstrated sharp deterioration of the loss ratios in 2015, which were pressured by FX-driven increases to average claim sizes and increased claims frequency. The insurer does not plan to reduce its presence in the motor segment in 2016, but aims to manage profitability through commissions. Given the highly competitive environment, Fitch considers this objective will be challenging. The insurer projects 15% growth in net written premiums in 2016 and will continue to write and reinsure large single contracts, which might add volatility to the monthly-calculated solvency margin. According to the insurer's budget, a further KZT500m of capital may be injected by the shareholder in 2016. From Fitch's Prism factor-based capital model perspective, AMANAT's risk- adjusted capital score remains below 'Somewhat Weak' based on 2015 results. It demonstrates a moderate positive trend compared with 2014 due to the growth of available capital. However, it is pressured by the relatively low quality of the investment portfolio, which includes some concentrated placements in local instruments of low credit quality and US dollar denomination. Fitch views this combination as particularly risky given the macroeconomic context in Kazakhstan. RATING SENSITIVITIES An upgrade of the IFS rating may result from a return to profitable underwriting, balanced premium growth and the risk-adjusted capital position, as assessed by Fitch's capital model, not weakening from the current level. Sustained failure to meet regulatory solvency requirements, in the absence of financial support from the shareholder, could lead to a downgrade. Contact: Primary Analyst Anastasia Litvinova Director +7 495 956 7082 Fitch Ratings CIS Limited Valovaya Street, 26 Moscow 115054 Secondary Analyst Anastasia Surudina Analyst +7 495 956 5570 Committee Chairperson David Prowse Senior Director +44 20 3530 1250 Media Relations in Moscow: Julia Belskaya von Tell, Moscow, Tel: + 7 495 956 9908/9901, Email: julia.belskayavontell@fitchratings.com [2016-02-29]