October 2, 2017 / 1:44 PM / a year ago

Fitch Affirms Russia's VSK Insurance at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 02 (Fitch) Fitch Ratings has affirmed Russia-based VSK Insurance Joint Stock Company's (VSK) Insurer Financial Strength (IFS) Rating at 'BB-', Issuer Default Rating (IDR) at 'BB-' and senior unsecured debt at 'BB-'. The Outlooks are Stable. KEY RATING DRIVERS The ratings reflect VSK's strong operating profitability, supported by investment returns and the adequate quality of the insurer's investment portfolio. The ratings are negatively impacted by VSK's weak risk-adjusted capital position, its high exposure to a single line with a deteriorating loss ratio (motor third-party liability insurance; MTPL) and somewhat weak liquidity position. The Central Bank of Russia has announced that it will rescue B&N bank, an asset of the Safmar group, which also has a 49% stake in VSK. Fitch expects that the state rescue of B&N bank will have a limited impact on VSK's business. VSK does not have strong links to B&N bank. The company has a deposit of RUB500 million placed with B&N bank, which at end-6M17 was less than 1% of VSK's investment portfolio and less than 3% of total shareholders' funds. B&N bank is one of VSK's distribution partners, and the insurer expects 12% of gross written premiums to be sold via B&N bank branches in 12M17, primarily life insurance business. VSK has ambitious plans to grow life insurance sales via its subsidiary company, Plc Insurance Company VSK Life Line (VSK Life Line), which became part of VSK group in July 2017. B&N bank branches are planned to be one of the main distribution channels, with the majority of VSK Life Line's total premiums sold via B&N banks in 6M17. Fitch believes that further rapid growth in the life insurance business might be more difficult following the rescue of the bank. However, given VSK's large existing non-life business, the implications for VSK's rating are limited. VSK reported strong interim financial results in 6M17, with net profits of RUB2.5 billion and an annualised net income return on equity of 31% (12M16: 29%). VSK's underwriting performance remained positive, with a combined ratio of 96% in 6M17 (12M16: 94%). The loss ratio was 54% in 6M17, slightly improved from 58% in 12M16. Compulsory motor-third party liability (MTPL) remains a significant proportion of VSK's business, with a 36% share of VSK's net written premiums in 6M17 (12M16: 40%). This line of business reported a worsened loss ratio of 91% in 6M17 (12M16: 80%). However, this was offset by strong results under motor damage line and corporate lines. Fitch believes there are risks around the company's ability to further mitigate MTPL's negative results given its high exposure to the line. The company's capital position remains weak, as measured by Fitch's Prism factor-based model. Due to a change in legislation around the calculation of the regulatory solvency margin following the transfer to unified industry-wide insurance standards since 1 January 2017, the company's reported regulatory solvency ratio as at end-2016 has decreased to 152% from 197%. This remains comfortably above statutory minimum levels, and the company expects the solvency margin to be around 140% at end-2017. VSK's liquidity position remains weak. The average credit quality of VSK's investment portfolio is strong for the ratings. Fitch views the company's financial flexibility as adequate for the ratings. RATING SENSITIVITIES The ratings could be downgraded if the combined ratio deteriorates to above 105% on a sustained basis, or if VSK's capital strength, as assessed by Fitch, weakens significantly. A downgrade could also result from material deterioration in investment or liquidity risks. The ratings could be upgraded if VSK achieves a profitable diversification of the insurance portfolio, or if VSK's capital strengthens significantly. Contact: Primary Analyst Sam Mageed Director +44 203 530 1704 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Anastasia Surudina Analyst +7 495 956 5570 Committee Chairperson Stephan Kalb Senior Director +49 69 768076 118 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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