OREANDA-NEWS. Fitch Ratings has affirmed JSC Kazakhmys Insurance Company's (Kazakhmys Ins) Insurer Financial Strength (IFS) rating at 'B+' and its National IFS rating at 'BBB(kaz)'. The Outlooks are Stable.

KEY RATING DRIVERS
The ratings reflect Kazakhmys Ins's challenges related to the planned growth strategy and high dependence on outwards reinsurance. They also factor in the insurer's solid, albeit moderately declining profitability, strong track record of shareholder support and a fairly robust capital position.

Kazakhmys Ins reported strong premium growth of 49% on a gross basis and 133% on a net basis in 1H15 compared with 1H14. Fitch views this growth as modestly diversified since it was mainly supported by the compulsory motor third party liability and workers' compensation insurance.

The insurer improved its underwriting result to a positive KZT152m in 2014 from a negative KZT248m in 2013, driven by a sixfold increase in net earned premiums. Subrogation income rose sharply to KZT380m from KZT101m, which supported the improved underwriting profitability. Fitch will monitor the quality of the relevant receivables in the near term. Supported by both strengthened underwriting and investment results, net income improved to KZT191m in 1H15 from a negative KZT123m in 1H14 (2014: KZT174m).

Kazakhmys Ins has rescheduled its planned KZT6bn capital increase to 2H15 from 1H15, due to longer-than-expected registration procedures. The capital is expected to be provided by current shareholders. Kazakhmys Corporation, the proximate shareholder of Kazakhmys Ins, also plans to increase its share in the insurer to 24.9% from the current 9.99%.

The main aim of the capital increase is to raise Kazakhmys Ins's net retention (calculated as a percentage of shareholders' equity) closer to the maximum level allowed by the regulator and to support business growth. Kazakhmys Ins has ambitious plans of achieving strong top line growth and developing a balanced portfolio of commercial and personal risks. 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.

Based on Kazakhmys Ins's regulatory solvency and Fitch's internal risk-adjusted capital assessment, capitalisation is viewed as fairly robust. This reflects the significant use of reinsurance and low net retained business volumes relative to shareholders' equity. However, Fitch believes the insurer's capital is at risk of a repeat of the significant write-offs of reinsurance receivables and negative revaluations of equity instruments seen in recent years.

Kazakhmys Ins continues to cede the majority of its premiums with the level of its reinsurance utilisation at 82% in 2014 and 88% in 1H15. The structure of outward reinsurance has been characterised by volatile reinsurance commissions and write-offs of receivables, leading to fluctuations in claims recoveries. 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, although this is likely to occur over the long-term.

RATING SENSITIVITIES
An upgrade could result from successful capital increase and execution of the insurer's growth strategy, with continuing underwriting profitability and diversification of the portfolio.

The ratings could be downgraded if the insurer fails to execute its planned growth strategy, reports underwriting losses and demonstrates inability to manage expenses prudently.