12:19 - 27.02.2019

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February 27, Fineko/abc.az. Fitch Ratings - Moscow - 26 February 2019: Fitch Ratings has revised Azerbaijan-based AzInsurance OJSC's (AzInsurance) Outlook to Stable from Negative and affirmed its Insurer Financial Strength (IFS) Rating at 'B' (Weak).

KEY RATING DRIVERS

The revision of the Outlook reflects AzInsurance's stronger than expected financial performance in 2017 and the absence of adverse reserve development based on the recently issued audited 2017 IFRS reporting. The rating continues to reflect the company's relatively strong capital position, its weak business position and high risk in the investment portfolio.

In its audited IFRS accounts for 2017, AzInsurance reported a net loss of AZN0.6 million and a negative 2% return on equity (ROE) after a period of sound profitability, with an average ROE of 34% in 2013-2016 and a strong 13% in 2016. The negative underwriting result with the combined ratio of 106% in 2017 was the key reason for the ROE weakening, as AzInsurance did not cut its administrative expenses in response to the reduced premium volumes after the loss of its cargo insurance portfolio in 2016.

In its unaudited regulatory accounts for 2018, AzInsurance reported a strong improvement of net profit to AZN4.7 million and ROE to 15%, which benefited from a positive underwriting result of AZN2.5 million and strong investment income of AZN4 million.

Although the insurer's gross written premiums fell 20% in 2018 from 2017, the insurer managed to achieve a more balanced portfolio structure with a reduced weight of compulsory motor third party liability (MTPL) insurance and increased volume of property insurance. As a result, the insurer's loss ratio improved to 27% in 2018 (unaudited regulatory accounts) from 43% (audited IFRS accounts) and 45% (2017 regulatory accounts) in 2017. The underwriting result in 2018 also benefited from the reserve releases in the compulsory MTPL and property lines.

AzInsurance's risk-adjusted capital position, as measured by Fitch's Prism Factor-based Model (FBM) remained strong for AzInsurance rating category in 2017, in line with 2016 results, based on IFRS reporting. The modest net loss reported in 2017 did not put significant pressure on the available capital. The target capital continued to benefit from relatively low business volumes.

AzInsurance's regulatory solvency margin, calculated according to a Solvency I-like formula, also remained strong at 248% at end-2018 (end-2017: 299%). Under the regulatory formula, AzInsurance's required capital is equal to the local minimum share capital of AZN10 million, whereas the premium-driven required capital stands well below at AZN4 million.

Fitch notes that the quality of AzInsurance's investment portfolio has moderately improved, but remains relatively low. At end-2018 49% of the insurer's investment portfolio was placed with banks of relatively weak credit quality, including related AFB Bank. The insurer's exposure to affiliated AFB Bank declined to 23% to equity at end-2018 (end-2017: 31%, end-2016: 37%: end-2015: 65%), although Fitch continues to view this level as significant.

In 2018 the insurer started to cede the management of approximately half of its investment assets to AzFinance Investment Company CJSC. These are predominantly placed in Azerbaijan government bonds. As of end-2017 the profile of non-bank investments was somewhat more risky with 11% of the managed assets invested in foreign stock and FX options, and the rest in government or government-related bonds.  AzInsurance maintains a comfortable liquidity position.

RATING SENSITIVITIES

Strengthening of the business profile, reflected in further business diversification and profitable growth, provided the insurer continues to adhere to prudent reserving and underwriting practices, could lead to an upgrade of AzInsurance's rating.

Capital depletion due to investment or underwriting losses or incompliance with the regulatory requirements could lead to a downgrade of AzInsurance's rating.