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Jan 21 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Russia-based JSIC GEFESTa€™s (GEFEST) Insurer Financial Strength (IFS) rating at a€˜B+a€™ and National IFS rating at 'A(rus)'. The Outlooks are Stable.
KEY RATING DRIVERS
GEFEST expects to report RUB22m of net income in 2013 mainly due to an improved underwriting result, following a small net loss of RUB7m in 2012. The insurera€™s full-year projections are supported by actual 9M13 results. The insurera€™s combined ratio is expected to improve to 100% in 2013 from 105% in 2012 due to tightened control of expenses. This was essential for the maintenance of the positive underwriting result in 2010-2012, but was only completed with some delay in 2013.
Based on its own assessment, Fitch believes that GEFESTa€™s risk-adjusted capital position is strong relative to net business volumes, particularly taking into account the limited historical volatility of the loss ratio. At the same time, Fitch believes that GEFESTa€™s exposure to investment-related risks creates pressure on capital adequacy due to significant low rated or affiliated investments. Conservative treatment of the affiliated investment in the risk-adjusted analysis indicates that GEFEST still has a strong capital position relative to its rating.
GEFESTa€™s liquidity has been contracting since 2011 with the ratio of liquid assets to net technical reserves falling to 75% at end-9M13 (or 60% with the short-term debt deducted from the liquid assets) from 83% at end-2012 and 96% at end-2011. This is due to the increasing weight of short-term lines of business, primarily motor insurance, and other one-off factors, including a large dividend distribution in 2011 and sizeable premiums refunds under some construction insurance contracts in 2012 due to the dropped financing by project owners.
Fitch understands that the weakened liquidity position triggered RUB100m borrowing in 4Q12 to raise liquid assets/technical reserves ratio for regulatory purposes. GEFEST expects that the liquidity position should gradually recover as dividend payments have reduced and premium refunds should also return to normal levels. Fitch believes that healthier liquidity will be also dependent on a stronger underwriting result.
The financial leverage ratio was low at 11% at end-3Q13. Fitch considers that GEFESTa€™s negative operating cash flow trend is unlikely to revert in the near term, thus making removal of debt from the balance sheet a challenging task for the insurer solely from retained earnings. A mitigating factor is that the affiliated nature of GEFESTa€™s creditors suggests there may be relatively favourable refinancing options available to the company.
Fitch views GEFESTa€™s investment portfolio as of moderate credit quality. The insurer held 49% of its investments or 34% of its equity in the form of cash or bank deposits with a small unrated affiliated bank at end-3Q13 (end-2012: 27% and 20%, respectively). Positively, GEFESTa€™s investment strategy remains conservative and focused on bank instruments, which accounted for 88% of the portfolio at end-3Q13 (79% at end-2012). The insurera€™s appetite for investments in precious metals has reduced to 6% from 17% in the same period. Fitch anticipates that GEFEST will continue to be conservative in its choice of investment instruments.
GEFEST has retained a strong level of underwriting expertise in local construction insurance, but the influence of this factor has weakened, as government-financed construction projects are increasingly concentrated with few leading insurers. In Fitcha€™s view, GEFEST currently demonstrates resilience to this trend, but its long-term ability to withstand competitive pressure is uncertain. Given GEFESTa€™s track record, Fitch does not expect that the insurer will pursue a speculative pricing strategy to maintain its market share.
The insurera€™s ability to improve its liquidity ratio to 80% (with the sum of the short-term debt deducted from the liquid assets) and maintain underwriting profitability at a positive level would be considered as a trigger for an upgrade.
Conversely, Fitch would consider any prolonged negative underwriting performance (a combined ratio over 105% for a number of years) as a trigger for a downgrade. In addition, Fitch would view loss of underwriting expertise as a trigger for negative rating actions.