The rating action follows the decision of the National Bank of Kazakhstan (NBK) to suspend AMANAT’s license for compulsory lines of business for three months effective 5 July 2017. The rating reflects AMANAT’s weak capitalisation, improved financial performance and the weak, albeit improving, credit quality of its investments.

AMANAT’s license suspension followed a supervisory inspection from NBK in 1Q17. The company’s license was suspended for compulsory business due to a number of violations, including failure to implement recovery measures and inaccuracies in solvency margin calculations. The company has agreed a number of remedial actions with the regulator, including the injection of additional capital by the shareholder. Fitch believes that this license suspension is significant for AMANAT’s credit profile given its focus on motor lines, in particular compulsory motor third-party liability (MTPL) which made up 14% of the company’s gross written premiums in 2016.

AMANAT’s reported regulatory solvency margin was 109% at end-2016, a slight improvement from 101% at end-2015. The company has little cushion in terms of the regulatory solvency margin and is at risk of non-compliance over time. Fitch views significant strengthening of the regulatory solvency position as unlikely in the short term.

Based on Fitch’s Prism factor-based model AMANAT’s risk-adjusted capitalisation was below ‘somewhat weak’ based on 2016 results, slightly lower than the 2015 result. Target capital increased due to a modest growth in net business volumes while dividend payments reduced available capital.

AMANAT reported a lower net income of KZT154 mln in 2016 compared with KZT705 mln in 2015. Unlike in 2015, the financial result was adversely impacted by the revaluation effect of foreign currency-denominated investments. To a lesser extent, it was supported by stronger investment returns of KZT317 mln, with investment yield growing to 10.7% in 2016. In 5M17 the company reported a net income of KZT253 mln underpinned by further robust investment income and positive underwriting results.

The company reported continued improvement of the combined ratio to 103% in 2016 from 118% in 2015 (2014: 137%), with the administrative expense ratio shrinking significantly to 44% in 2016 from 60% in 2014. The company is focused on reducing administrative expenses via staff optimisation and increased IT automation. AMANAT’s reduced loss ratio of 38% (2015: 50%) was another driver of the improved underwriting result in 2016.

Bank deposits accounted for 42% of the AMANAT’s total investments at end-2016 compared with 52% at end-2015, and stood at 45% at end-5M17. All deposits are held in local banks mainly rated in the B category. Fitch believes there are risks from the weak average credit quality of these instruments, which is mainly attributable to the limited financial standing of the banking system of the Republic of Kazakhstan.

Rating Sensitivities

Fitch will resolve the RWN as follows:

The ratings are likely to be downgraded if the company’s compulsory lines license is not restored, if the shareholder fails to provide the necessary capital support or if significant franchise damage occurs as a result of license suspension.

The ratings are likely to be affirmed upon restoration of the licence and injection of funds as required by NBK, provided significant franchise damage has not occurred as a result of the license suspension.

Contact:

Primary Analyst
Anastasia Surudina
Analyst
+7 495 956 5570
Fitch Ratings CIS Limited
Valovaya Street, 26
Moscow 115054
.;
Secondary Analyst
Sam Mageed
Director
+44 20 3530 1704