KEY RATING DRIVERS
Kazakhmys Ins's capital position is strong for the rating level and the insurer has a track record of profitability. Offsetting factors include the low average credit quality of its investment portfolio, aggressive growth strategy and high dependence on outwards reinsurance.
Based on Fitch's Prism factor-based model (Prism FBM), Kazakhmys Ins's capital score improved to "extremely strong" at end-2016, from "strong" at end-2015. The company maintained low net premium volumes, which together with considerable reinsurance utilisation, led to stable target capital. In addition capital injections from shareholders increased the available capital and contributed to the strengthened capitalisation.
The capital injections have also created an extensive buffer in the insurer's regulatory solvency margin, which grew to 411% at end- 2016. However, due to subsequent considerable top-line gross premium growth and changes in the solvency reporting calculation basis the regulatory solvency margin decreased to, albeit a still comfortable level of, 133% at end-5M17.
Kazakhmys Ins has a track record of positive financial results over the last five years. In 2016 the company reported moderate net income of KZT355 million compared with the 2015 result of KZT994 million. Unlike 2015, the net result in 2016 was mainly supported by a strong gross investment component of KZT907 million and by rather modest underwriting income. Adversely, a considerable impairment loss of KZT417 million and an FX loss on investments of KZT240 million negatively impacted earnings, and led to a net investment result of KZT240 million. In 5M17 the company reported a modest net income of KZT23 million based on regulatory statutory reporting, supported by investment returns as was the case for 2016 results.
In 2016 Kazakhmys Ins's underwriting result turned positive at KZT153 million compared with an underwriting loss of KZT308 million in 2015, with the combined ratio improving to 96% from 115%. The loss ratio decreased to 35% in 2016 from 40% in 2015, with compulsory motor-third party liability insurance being the main contributor.
Fitch views Kazakhmys Ins's investment portfolio to be of weak credit quality. Bank deposits accounted for 67% of Kazakhmys Ins's total investments at end-2016 compared with 79% at end-2015, before falling further to 50% at end-5M17. All deposits are held in local banks mainly rated in 'B' category. Fitch notes the weak average credit quality of these banks, which is mainly attributable to the poor financial standing of the local banking system.
The company reported significant growth in 2016, with gross written premiums increasing by 160% from 2015 levels. Growth on a net premium basis was lower at 83% in 2016. Net growth was largely driven by compulsory motor third-party liability (MTPL) policies and, to a lesser extent, by the general third-party liability (TPL) business. As a result, the share of MTPL in the company's underwriting portfolio grew to 62% in 2016 from 52% in 2015.
Kazakhmys Ins's reinsurance utilisation ratio was very high and increased to 89% in 2016 from 84% in 2015 with a five-year average of 81%. The company uses reinsurance primarily for fronting purposes on property, third-party liability, and health risks for big commercial accounts, including Kazakhmys Corporation.
The ratings could be upgraded if Kazakhmys Ins improves the average asset credit quality of investments and successfully implements its growth strategy, with sustainable underwriting profitability and diversification of the portfolio.
The ratings could be downgraded if the regulatory solvency margin falls below 110% on a sustained basis or if shareholders fail to support Kazakhmys Ins's growth strategy.