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

KEY RATING DRIVERS
The ratings reflect Kompetenz's limited financial flexibility, continuing loss-making underwriting performance, a business strategy that Fitch believes is challenging to execute, the moderate quality of its investment assets, and restored regulatory solvency position.

Kompetenz has continued to grow rather aggressively with gross written premiums up 105% yoy in 9M15 on a gross basis and 172% on a net basis. The growth has been concentrated in the compulsory motor third party liability (MTPL) insurance business, with this line being the key contributor to the increase on a net basis. The line's weight in net written premiums increased to 62% in 9M15 from 51% in 2014 and 17% in 2013.

Although this growth allowed Kompetenz to ease the pressure of administrative expenses on its combined ratio, Fitch believes that it will be challenging for the insurer to achieve a sustainable healthy underwriting result over the longer term with the current concentration on MTPL. The Kazakh MTPL segment remains highly competitive and is associated with high commission rates. MTPL premiums for the sector grew only 16% in 9M15.

Despite the growth, Kompetenz again reported a negative underwriting result, albeit a smaller loss of KZT251m for 9M15, compared with the KZT270m loss a year ago. The underwriting loss in 9M15 was driven by a number of factors. These included growth of expenses following rapid expansion in the MTPL segment, continuing adverse reserve development for the workers' compensation line (which is in run-off), and weak performance of the health insurance line.

The underwriting loss was more than offset by KZT527m FX gains on USD-denominated investments, which were the key contributor to Kompetenz's strong net profit of KZT404m in 9M15 (2014: net loss KZT380m). The FX gains were the result of a sharp depreciation of the Kazakh tenge in August 2015. Fitch views this aspect of Kompetenz's profitability as being of a non-recurring nature.

In line with many local peers, Kompetenz increased the share of USD-denominated investment instruments to mitigate the impact of tenge depreciation on its balance sheet. The change in the currency structure has been achieved through a shift to a less risk-averse investment strategy. The share of 'CCC'-rated USD-denominated corporate bond in the investment portfolio grew to 14% at end-9M15 from 0% at end-2014.

According to Fitch's Prism factor-based capital model, Kompetenz's risk-adjusted capital score was below 'somewhat weak' based on 2014 results. Fitch expects that the strong profit of 9M15 should help the company to improve its capital score in 2015. The regulatory solvency position stood at a compliant level of 106% at end-September 2015, although with only a thin cushion above the minimum of 100%.

RATING SENSITIVITIES

Key rating triggers that could result in an upgrade include a sustained improvement in the insurer's net result to positive levels, diversified premium growth and no weakening of its Prism factor-based capital model score.

The ratings could be downgraded if the insurer's regulatory solvency margin remains exposed to non-compliance risks on a prolonged basis and the insurer fails to improve its operating performance on a sustainable basis.