OREANDA-NEWS. Fitch Ratings has affirmed Kazakhstan-based AMANAT Insurance's (AMANAT) Insurer Financial Strength (IFS) rating at 'B' with a Stable Outlook. Fitch has also affirmed the National IFS rating at 'BB(kaz)' and revised the Outlook to Positive from Stable.

KEY RATING DRIVERS
The revision of the Outlook on the National IFS rating to Positive reflects Fitch's expectation that the company will be able to restore the solvency margin to a compliant level.

The ratings reflect AMANAT's limited progress in strengthening its underwriting performance to date, its relatively weak capital position and the moderate quality of its investment assets. The ratings also take into account the track record of moderate capital support from the existing shareholder.

In 2014 AMANAT reported a KZT1.1bn net loss, which was largely driven by a KZT0.8bn casualty claim payment. The company planned to offset this loss with an equivalent subrogation income accrued in December 2014 in its monthly statutory reporting. However, the new management team decided to fully write off these subrogation receivables in the audited 2014 annual reporting.

The new management team joined AMANAT in early 2015, in accordance with the shareholder's decision. The new team has come from another medium-sized local company.

In 2009-2013 AMANAT reported a 6% return on adjusted equity (ROAE) on average, which represented a volatile underwriting result and more stable investment income.

The insurer's combined ratio increased to 134% in 2014 from 98% in 2013 due to the loss ratio component growing to 58% from 15%. In 4M15 the insurer's combined ratio returned to a more normal 109% (4M14: 119%) driven by a stronger loss ratio and flat commissions and administrative expenses. AMANAT's combined ratio continues to be pressured by levels of administrative expenses, which remained large at 57% in 2014, almost unchanged from 60% in 2013. Fitch believes that a reduction in the expense ratio, through either a cut in expenses or expense economies made at the point of business growth, would be essential for a healthier underwriting result.

AMANAT breached the regulatory solvency margin at end-4M15. The margin reduced to 93% from an already stretched 103% at end-2014. The key reason for this breach was a sharp growth of reinsurance payables to KZT0.6bn at end-4M15 from an immaterial figure at end-2014. The pressure of payables was in the context of substantial facultative outwards reinsurance placements of property and casualty risks and should flatten through the year. The shareholder has demonstrated moderate support to the company and injected KZT360m in 4M15 with an informal commitment to provide an additional KZT200m in the short term.

From a Prism factor-based capital model perspective, AMANAT's risk-adjusted capital score remains below 'somewhat weak' based on 2014 results. It demonstrates a moderate negative trend compared with 2013. The target capital has moderately increased driven by 18% growth of net written premiums (NWP) in 2014 from 2013, whereas the available capital was significantly depleted by the peak net loss in 2014. The asset risk has modestly improved after a strengthening of the average credit quality of the fixed-income instruments in the portfolio.

Based on the continuing strong growth of NWP at 14% and a non-annualised ROAE of negative 5% in 4M15, Fitch considers any significant strengthening of AMANAT's Prism capital score as unlikely in 2015, even with the planned capital injections.

RATING SENSITIVITIES
An upgrade of the National IFS rating would result from the company's sustained return to compliance with the regulatory solvency margin.

An upgrade of the IFS rating may result from a return to profitable underwriting, balanced premium growth and the risk-adjusted capital position, as assessed by Fitch's capital model, not weakening from the current level.

Sustained failure to meet regulatory solvency requirements, in the absence of financial support from the shareholder, could lead to a downgrade.