25.06.2019
Fitch Affirms Amanat Insurance at 'B'; Outlook Stable

Fitch Ratings has affirmed Kazakhstan-based Joint Stock Company Amanat's (Amanat) Insurer Financial Strength (IFS) Rating at 'B' and National IFS Rating at 'BB+(kaz)'.

Fitch Ratings has affirmed Kazakhstan-based Joint Stock Company Amanat's (Amanat) Insurer Financial Strength (IFS) Rating at 'B' and National IFS Rating at 'BB+(kaz)'. The Outlooks are Stable.


KEY RATING DRIVERS


The ratings reflect AMANAT's weak business profile, negative underwriting performance, and uncertainty over the success of the company's new business strategy implementation, which Fitch views as challenging. The ratings also reflect Amanat's strong risk-adjusted capital position but moderate regulatory capital position and asset quality.

After a three-month suspension of the license for compulsory lines in 2017, Amanat reviewed its strategy and substantially reduced its participation in commercial property and liability risks, which required fronting reinsurance, and focused on the growth and diversification of its net written premiums. Fitch believes that improving the quality of Amanat's insurance portfolio (on a net basis) is challenging as the Kazakh insurance sector mainly consists of captive commercial risks that are ceded abroad and a nascent, highly competitive, compulsory motor third-party liability (MTPL) insurance segment.

The new strategy led to a 33% decline in Amanat's gross written premiums (GWP) but a 17% increase in net written premiums (NWP) in 2018. The business mix has become somewhat less diversified with the weight of MTPL and motor damage in GWP growing to 60% in 2018 from 46% in 2017. The combined ratio deteriorated to 115% from 105% following a weakening across all key components, including loss, commission and administrative expense ratios. This marked a return to the five-year average combined ratio of 112% in 2013-2017.

The restructuring of the portfolio has continued so far in 2019 with the weight of MTPL in the insurer's GWP growing to 52% in 5M19 from 21% in 5M18 and 27% in 2018. Amanat's MTPL portfolio grew much faster than the rest of the local MTPL segment. Fitch understands from management that this fast growth is partially due to Amanat's strengthening in the sale of cross-border MTPL policies, which are associated with low loss ratios and high acquisition costs. As a result, the insurer managed to improve the combined ratio to 102% in 5M19 from 113% in 5M18. Fitch believes it might be difficult to maintain the same improvement in the whole of 2019 due to competitive pressure.

The recent tightening of the local insurance prudential regulations from June 2019 have a less pronounced effect on Amanat's prudential metrics than other insurers as the company does not have a high reliance on reinsurance for general third-party liability (GTPL) and financial risks. Nevertheless, the insurer's available capital under the regulatory solvency formula is still expected to be impacted by the requirement to deduct tangible assets. The company does not yet plan to request capital from shareholders to manage its solvency margin.

Amanat's risk-adjusted capital , as measured by Fitch's Prism Factor-based model (Prism FBM), remained 'Strong' based on 2018 results, in line with 2017's. The score was supported by a series of capital injections in 2017, which aimed to support the regulatory solvency margin, calculated based on a Solvency-I like formula. The margin was a moderate 121% at end-5M19 (end-2018: 144%), as the required capital was driven by a fixed minimum guaranteed fund for non-life insurers rather than the volume of premiums or claims experience. This means that the company can increase its business volumes while keeping its target capital for some time.

The credit quality of Amanat's investment portfolio moderately improved in 2018 as the share of investment-grade bonds grew to 53% at end-2018 from 47% at end-2017 at the expense of lower-rated bank deposits.

The insurer also maintains a very strong liquidity position with Fitch-calculated liquid assets-to-net technical reserves ratio at 235% at end-2018 and a moderate exposure to FX securities with 33% of investments denominated in US dollars.

RATING SENSITIVITIES


The ratings could be upgraded if Amanat achieves a significantly stronger underwriting performance and maintains the asset quality of its investment portfolio.

The ratings could be downgraded if Amanat breaches the prudential requirements without being able to remedy it within a short timeframe.
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