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April 7 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Garant Versicherungs Aktiengesellschaft Vienna's (Garant) Insurer Financial Strength (IFS) Rating at 'A-'. The Outlook is Stable.
KEY RATING DRIVERS
The affirmation reflects Fitch's view of the strong probability of support, if needed, for Garant from its parent, the Belgian state-owned credit insurer, Office National du Ducroire (ONDD). Fitch considers Garant as strategically 'very important' to ONDD under its insurance rating methodology. The agency considers that ONDD's creditworthiness is strong, and based on ONDD's potential support for Garant, has notched up by three levels the latter's rating from its standalone credit strength. The company is a small, niche player in the political risk insurance business and is 95.6%-owned by ONDD.
On a standalone basis, Garant remains very strongly capitalised as reflected in a regulatory solvency ratio that at FYE13 was 4.5x the minimum required. The company's gross written premiums increased to EUR33.3m at FYE13 from EUR29.4m at FYE12, reflecting continued demand for political risk insurance. Nevertheless, its underwriting performance can be volatile and was weaker in 2013 with a combined ratio of 97.5%, up from 87.3% at FYE12, according to Fitch's calculations. Net profit materially decreased to EUR364,000 from EUR3.8m in 2012, mainly due a weaker underwriting performance, declining investment income and higher capital losses.
The company has a prudent investment strategy, but in 2013 the investment result was negatively affected by value adjustments and foreign exchange losses. Garant makes extensive use of reinsurance, which Fitch believes is adequate for the risks the company assumes. Nevertheless, there is concentration risk in the company's core business as Garant specialises in credit insurance and political risk insurance, mostly focusing on emerging markets.
Fitch views the company's financial position as adequate but, because of the activities of its policyholders and their close linkage to the global economic environment, claims against it are likely to be somewhat volatile. The agency considers Garant's adequate reserving and its ability to recover a material portion of claims paid as offsetting factors. Fitch expects Garant to reinforce its disciplined and selective underwriting policy in the near future.
Garant's reinsurance programme provides high coverage through quota-share, excess-of-loss reinsurance and stop-loss cover. Fitch considers the company's reinsurance programme as a major factor supporting its rating and does not expect material changes to the current reinsurance programme.
The Stable Outlook reflects Fitch's expectations that Garant will maintain its current solid solvency level and reduce the volatility of its profitability through disciplined underwriting and expense management. This is particularly important as demand for credit insurance is likely to remain strong in light of recent political disturbances in several regions and limited financing options.
Although unlikely in the short- to medium-term, a change in Fitch's opinion on Garant's strategic importance to ONDD to 'core' from 'very important' could lead to an upgrade as Fitch views ONDD's credit quality as higher than that of Garant on a standalone basis.
Key rating triggers that could result in a downgrade include deterioration of ONDD's credit quality and/or an adverse change to Fitch's view of Garant's 'very important' strategic status, deterioration of Garant's standalone credit position through a lower solvency level to below 400% (451% at FYE13) or a sustained deterioration in the combined ratio to materially above 100% (97.5% at FYE13).