Fitch affirms ratings of Insurance company Amanat Insurance (Kazakhstan); outlook Stable
July 15. KASE
KEY RATING DRIVERS
AMANAT’s ratings reflect adequate, albeit declining, risk-adjusted capitalisation offset by ongoing regulatory solvency risk and relatively weak profitability. The ratings also reflect the low credit quality of AMANAT’s investment portfolio, with substantial holdings of sub-investment-grade debt and equity.
AMANAT’s Fitch-calculated risk-adjusted capital adequacy showed a decline between 2010-2012. The decline in 2011 was caused by the fact that the net premium growth was higher than the increase in capital following an equity injection in Q411. In 2012, a significant dividend payment of KZT400m further weakened the risk-adjusted capital position. The dividend withdrawal raises some concerns about AMANAT’s future capital management policy. Nevertheless, the company’s risk-adjusted capital position remains supportive of the current ratings.
AMANAT’s regulatory solvency margin reached a marginal level of 100.3% of the required minimum during Q412 after a period of comfortable surplus in Q411 and most of 2012. The main reason for this deterioration was a reduction in available capital, which followed the acquisition of several large insurance contracts. The regulatory solvency margin subsequently improved to 120% at year-end 2012, but declined again to 111% at June 2013.
Fitch is concerned that by maintaining low coverage of the statutory solvency margin there is an increased risk that a breach of the minimum regulatory solvency requirement could occur from unexpected business fluctuations.
AMANAT’s return on adjusted equity averaged to only 2% between 2010-2012. The low level of overall profitability is explained by the poor technical performance of its insurance operations, in contrast to the good performance of its investment portfolio. AMANAT’s combined ratio improved moderately in 2012 to 108% (2011 – 114%). This was caused by an improvement in the loss ratio component, while the commission and expense ratios remained relatively stable compared to 2011.
The accounting year loss ratio decreased to 28.7% at end-2012 from 35.2% at end-2011. This was driven by positive loss reserve development in the same year, which more than offset a moderate rise in claims activity across a number of lines.
The riskiness of AMANAT’s investment portfolio has been growing over the past three years. Equity instruments accounted for 19.2% of total investments at end-2012, up from 8.7% at end-2011 and 4.8% at end-2010. Fitch is somewhat concerned by the growing equity exposure as AMANAT has recently had negative experience in equity investments. The investment portfolio also contains significant concentrations.
Fitch notes that the scope for positive rating action is currently limited in the absence of evidence of more conservative management of the regulatory solvency ratio. Conversely, a prolonged fall of AMANAT’s solvency margin below 100%, in the absence of further financial support from the shareholder, could lead to a downgrade.
AMANAT’s ratings could be upgraded if the company reported two consecutive years of underwriting and investment profits.