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Fitch Rates Kafolat 'B+'; Outlook Stable
December 20, 2016 / 2:50 PM / a year ago

Fitch Rates Kafolat 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, December 20 (Fitch) Fitch Ratings has assigned JSC Insurance Company Kafolat (Kafolat) an Insurer Financial Strength (IFS) Rating of 'B+'. The Outlook is Stable. KEY RATING DRIVERS The rating reflects Kafolat's state ownership, the company's strong operating profile, its relatively strong capital position and positive profitability. The rating is negatively impacted by reserving risk and the relatively low quality of the insurer's investment portfolio. The state and state-owned companies hold a combined 93% interest of Kafolat. Of this, 66.51% was held by The Ministry of Finance at end-9M16. Another 11.72% and of 7.77% are held by the National Bank of External Economic Activity and by a state-owned mining company Navoi Mining and Mettalurgical Combinat. The remaining shareholders, which hold a combined 14% of shares of the company, have stakes of less than 3% each. The Uzbek state provided relatively strong support for the state-owned companies via considerable capital injections in previous years, which allowed the companies to form a sound capital base and to adapt to growing business volumes. Kafolat's capitalisation is supportive of the rating. According to Fitch's Prism factor-based capital model, Kafolat's risk-adjusted capital score was 'very strong' based on 2015 results. The insurer nominally maintains sufficient capital relative to its business volumes with a Solvency I-like statutory ratio of 317% at end-9M16. Kafolat's capital could be exposed to the risk of reserving deficiency for the workers compensation line. The long-tail nature of the risk and the absence of the government guarantees on such risk, plus regulation of tariffs and sums insured significantly increase the reserving risk on this line. Kafolat does not test the sufficiency of this reserve in a run-off scenario, as this is not required by the regulator. In Fitch's view, Kafolat's investment portfolio is of low quality. This reflects the average credit quality of bank deposits, which accounted for 53% of the company's total investment portfolio at end-2015. Local banks are mainly constrained by sovereign risks and rated in the 'B' category. Furthermore, Kafolat's ability to achieve greater diversification is limited by the narrow local investment market. Kafolat has been profitable in the last two years. Net profit has been earned through investment, which considerably offset its volatile underwriting performance in 2011-2015. The net result in 2015 was robust with a return on equity (ROE) of 12.1%, albeit down from 18.6% in 2014. Despite double-digit growth of gross written premium (GWP) in 2015 an increase in administrative expenses weakened the combined ratio to 97% (2014: 86%). The administrative expense ratio increased to 59.9% in 2015 from 50.6% in 2014. Fitch believes that a reduction in administrative costs is an important area of focus for Kafolat, which would be beneficial for its financial performance and earnings. Kafolat's underwriting result for compulsory lines benefited from a strong loss ratio of 23.2% in 2015 (2014: 23.1%). Apart from compulsory lines, Kafolat writes a range of voluntary lines, which include property and liability, health and accident insurance, financial risks and export risks. Property insurance accounted for 30% of net written premiums in 2015, with a loss ratio of 15.1% (2014: 4.3%). Kafolat is the third-largest insurer in Uzbekistan by GWP, with 10.5% of the market in 2015. Unlike that of the sector, compulsory lines have dominated Kafolat's business mix, accounting for 69% of GWP in 2011-2015. RATING SENSITIVITIES A change in Fitch's view of the financial condition of the Republic of Uzbekistan or a significant change in the insurer's relations with the government would likely have a direct impact on Kafolat's ratings. Sustained reserving deficiencies leading to operational losses or capital depletion could also lead to a downgrade. 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 Committee Chairperson Stephan Kalb Senior Director +49 69 768076 118 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Date of Relevant Rating Committee: 13 December 2016 Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016780 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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