The rating reflects Kafolat’s state ownership, the company’s strong operating profile, relatively strong regulatory capital position and positive profitability.

The Uzbek state and state-owned companies hold a combined 93% interest in Kafolat, with the Ministry of Finance holding 66.51% at end-9M17. The Uzbek state has provided strong support for 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.

From a regulatory capital perspective, Kafolat is in compliance with solvency requirements. The insurer maintains strong capital relative to business volumes with a statutory capital ratio of 267% at end-9M17.

Kafolat reported a strong net profit of UZS9 billion in 2016, in line with net profit of UZS8.5 billion in 2015, with a return on equity of 9% (2015: 14%). Both robust underwriting results and a sizeable investment component contributed to the net result. Kafolat’s combined ratio was 92% in 2016, in line with 91% in 2015.

In 9M17 Kafolat remained profitable, reporting net profit of UZS1.5 billion. Strong investment returns and to a lesser extent, FX gains on investments stemming from devaluation of the national currency in September 2017 supported the net result. Unlike in previous years, in 9M17 the company reported an underwriting loss of UZS4.4 billion and a combined ratio of 105% based on statutory reporting figures, primarily related to workers’ compensation and accident and health insurance lines.

In Fitch’s view, Kafolat’s investment portfolio is of low quality. This reflects the average credit quality of bank deposits, which accounted for 58% of the total investment portfolio at end-2016. The local banks are mainly constrained by sovereign risks and rated ‘B’. However, Kafolat’s ability to achieve better diversification is limited by the narrowness of the local investment market.

Kafolat is 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, plus the 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.

Kafolat is the third-largest insurer in Uzbekistan by gross written premiums, with 10.9% of the market in 2016 (2015: 10.5%). Unlike the sector, compulsory lines have dominated Kafolat’s business mix, accounting for 63% of net written premiums on average in 2012-2016

A change in Fitch’s view of the financial condition of the Republic of Uzbekistan would likely have a direct impact on Kafolat’s rating.

Any significant change in the insurer’s relations with the government would also be likely to directly affect its rating.

Sustained reserving deficiencies or underwriting losses leading to operational losses or capital depletion could also lead to a downgrade.