Fitch assigns ratings to Insurance Company Kazakhmys; outlook Stable

December 12. KASE. Fitch Ratings. Moscow

Fitch assigns ratings to Insurance Company Kazakhmys; outlook StableFitch Ratings has assigned JSC Kazakhmys Insurance Company (Kazakhmys Ins) an Insurer Financial Strength (IFS) rating of ‘B+’ and National IFS rating of ‘BBB(kaz)’.

The  Outlooks are Stable.

KEY RATING DRIVERS

The ratings reflect Kazakhmys Ins’s solid albeit moderately declining profitability, strong track record of shareholder support and relatively robust capital position.  Offsetting factors include challenges related to the planned growth strategy and high dependence on outwards reinsurance.

Kazakhmys Ins reported KZT487m net profit in 9M14 (2013: KZT467m, 2012: KZT807m), which translates into return on adjusted equity (ROAE) of 14% in 9M14 (non-annualised), 19% in 2013 and 40% in 2012. The insurer’s profitability has been supported by both the underwriting result and the investment return. In 2013- 9M14 the insurer’s net profit and ROAE declined, mainly due to the reduced contribution from the underwriting result in the context of high levels of reinsurance  cessions and increased expenses.

Kazakhmys Ins expects to receive KZT6bn of new capital in 1H15 from the current shareholders. The main aim of the capital increase is to raise the net retention (calculated as a percentage of shareholders’ equity) closer to the maximum level allowed by the regulator and to support the growth of business volumes.

Kazakhmys PLC, the former majority ultimate shareholder of Kazakhmys Ins, has also helped to protect the insurer’s capital through the termination of prior-year  workers’ compensation policies, which carried significant reserving risk.  Kazakhmys PLC transferred the residual loss reserve of USD84m (KZT1.2bn) to  its own balance sheet in 2013. Kazakhmys Corporation, the proximate shareholder  of Kazakhmys Ins, also plans to increase its share in Kazakhmys Ins to 24.9%  from the current 9.99% in 1H15.

Based both on the regulatory solvency position and Fitch’s internal risk-adjusted  capital assessment, the agency views Kazakhmys Ins’s capitalisation level as  relatively robust, reflecting the significant use of reinsurance and low net retained  business volumes relative to shareholders’ equity. However, Fitch believes the  capital is exposed to the risk of a repeat of the notable write-offs of reinsurance  receivables and negative revaluations of equity instruments which have occurred in  recent years.

Kazakhmys Ins has ambitious plans aimed at achieving strong top line growth and developing a balanced portfolio of commercial and personal risks. Its expense ratio  increased materially to 87% in 2013 from 18% in 2012 and remained high at 58%  in 9M14 as the company moved from being a captive insurer to a standalone market-oriented insurer from 2012. Fitch views maintenance of underwriting discipline and prudent expense management as important rating factors for the company in its initial growth phase in the open market.

Kazakhmys Ins has gradually increased the level of its reinsurance utilisation to  90% in 9M14 from 82% in 2013 and 55% in 2009. The structure of the outwards reinsurance has not been stable and was accompanied by volatile levels of reinsurance commissions and significant fluctuations in the write-offs of receivables, which reduced or increased claims recoveries in different periods. Kazakhmys Ins uses reinsurance primarily to protect its large commercial accounts. Fitch expects reinsurance use to decline once the company raises additional capital and increases its underwriting capacity.

RATING SENSITIVITIES

The ratings could be upgraded if the scheduled capital increase is completed and there is evidence of the successful execution of the strategy, with continuing underwriting profitability and diversification of the portfolio.

The ratings could be downgraded if the insurer fails to complete the scheduled capital increase and as a result is unable to execute its planned growth strategy.  Weak implementation of the growth strategy accompanied by underwriting losses  and the inability to manage expenses prudently could also trigger a downgrade.

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