Fitch affirms ratings of Insurance company "Kazakhmys"; outlook Stable

/Fitch Ratings, Moscow, March 24, 16, heading by KASE/ – 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 rwriting 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. 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 Federico Faccio Senior Director +44 20 3530 1394 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com [2016-03-25]