The outlook revision stems from the possibility that GRAIN Insurance's capital or performance may be affected by changes in the business fortune of its shareholder. In our base-case scenario, however, we expect the main rating factors will remain balanced over the next 12 months, and we continue to see positive developments in the company's enterprise risk management (ERM).
The rating affirmation reflects our view of the company's highly vulnerable business risk profile and weak financial risk profile.
We believe that GRAIN Insurance's weak competitive position, stemming from its very small size in terms of premium written, Kazakhstani tenge (KZT) 1.6 billion (or $4.6 million) in 2016, and its predominant focus on the agricultural sector, are so far not affected. GRAIN Insurance's financial risk profile continues to be supported by capital adequacy that significantly exceeds our threshold for the 'AAA' level under our risk-based capital model, as well as by our overall positive view that the regulatory framework provides some protection against negative intervention from shareholders.
We note, however, that given uncertainties with regards to the future business fortunes of Nurlan Tleubaev, and ongoing financial difficulties across his businesses, we cannot rule out direct or indirect effects on GRAIN Insurance.
So far, GRAIN Insurance's exposure to problematic Delta Bank is limited at 9% of its invested assets, or 12% of total adjusted capital as of Dec. 31, 2016. The company has not yet recognized any losses on this exposure, but if they emerge we would not expect them to damage the company's financial risk profile.
Nevertheless, we are revising our assessment of GRAIN Insurance's liquidity to strong from exceptional, given the increased credit risk and continued growth of reserves following premium growth in 2016; this change is neutral to our rating assessment, however.
Although GRAIN Insurance's operating results are volatile, the 2016 pro forma results are above our expectations, with the return on equity at 14.8% and return on revenues at 36.9%.
The developing outlook on GRAIN Insurance indicates that we could affirm, raise, or lower our ratings on the company during the next 12 months.
A positive rating action would depend on GRAIN Insurance's financial and business risk profiles remaining immune to the ongoing financial difficulties of its shareholder, as well as on improvements in GRAIN Insurance's ERM, notably the tightening and further enhancement of risk management practices linked to catastrophe and accumulation risks.
We could take a negative rating action if we see that GRAIN Insurance's financial or business risk profile is weakening as a result of its shareholder's ongoing financial difficulties. In particular, we could downgrade the company if we observe significant deterioration of capitalization or if we believe that its current niche competitive position is at risk.