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Fitch Affirms AHML Insurance at 'BB'; Outlook Stable
May 19, 2014 / 3:42 PM / 4 years ago

Fitch Affirms AHML Insurance at 'BB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, May 19 (Fitch) Fitch Ratings has affirmed Russia-based OJSC AHML Insurance's (AHMLI) Insurer Financial Strength (IFS) rating at 'BB' and its National IFS rating at 'AA-(rus)'. The Outlook is Stable. KEY RATING DRIVERS The ratings continue to reflect the 99.98% ownership of AHMLI by the state-owned Agency for Housing Mortgage Lending (AHML) and significant capital injections from the parent. The ratings also take into account that AHMLI does not have any guarantee or other formal support agreement either from the government or from the parent. AHMLI receives substantial non-monetary support in the form of methodological and statistical advice from AHML. AHMLI failed to meet its aggressive growth targets in 2013 as gross written premiums (GWP) fell 46% yoy in 2013 (or 57% if premium refunds are deducted from GWP), mainly due to pool and bulk products. Although the insurer's claims experience has remained favourable to date, business volumes were insufficient to compensate for administrative expenses. The insurer continued to offset underwriting losses with investment returns, improving its net profit to RUB25m in 2013 from RUB7m in 2012. The reduction of business volumes was primarily driven by trends in the Russian residential mortgage lending sector. Firstly, because AHMLI's parent refinanced a smaller volume of mortgage loans in 2013, AHMLI had less opportunity to sell insurance coverage for the portfolios eligible for refinancing on a semi-compulsory basis. Secondly, AHMLI's legal incentives to make mortgage insurance attractive for banks not using AHML's refinancing have yet to be adopted. Thirdly, the insurer's targeted segment of loans with high loan-to-value (LTV) ratios shrank in 2013. Finally, an audit of mortgage repayments by AHML and AHMLI triggered more premium refunds in 2013. Nevertheless, AHMLI has been successful in its strategy of becoming the local pioneer underwriter of securitised pools of mortgage loans. This success significantly increased the insurer's risk-in-force to RUB8.1bn at end-2013 from RUB3bn at end-2012. AHMLI's exposure to risk has not increased proportionally as the insured pools had significantly lower average LTV levels than loans insured under primary flow and bulk products. Fitch considers AHMLI's capitalisation to be significantly in excess of that needed for its risk-in-force. AHMLI operates as a specialised mortgage (re)insurer in both the primary and secondary segments of the residential mortgage lending sector in Russia. Key industry risks faced by mortgage insurers include a deteriorating economic environment - specifically, rising unemployment, along with declining lending and underwriting standards, and elevated house prices and mortgage debt levels. The insurer's exposure to a cyclical deterioration in these risk factors is heightened by the monoline and long-term nature of the business. At present AHMLI offers three products: primary flow, bulk and pool insurance. In all cases the insurer protects either lenders or investors from principal and interest losses in the event that a borrower defaults and the property held as security is sold for less than the amount owed. According to the strategy set by its parent, AHMLI plans to provide insurance for up to 21% of securitised pools issued in Russia by 2015 and sees risk-in-force increasing to RUB37bn in 2015. Fitch views these growth targets as rather aggressive and unlikely to be achieved within the stated timeframe. RATING SENSITIVITIES Key rating triggers for a downgrade include a reduction in AHML's participation to a minority interest, or aggressive growth, both in volume and product mix, as rapid growth can often be accompanied by declines in underwriting quality or pricing. The rating may also be downgraded if capitalisation deteriorates to a level no longer consistent with the risks for the rating level. Given AHMLI's current overcapitalisation, Fitch envisages such a scenario would materialise only if the company is unable to access new capital over the medium term. An upgrade is unlikely in the near- to medium-term based on the company's credit fundamentals. However, an upgrade could be possible if AHMLI receives a formal support agreement from AHML. Contact: Primary Analyst Anastasia Litvinova Director +7 495 956 7082 Fitch Ratings CIS Limited Valovaya Street, 26 Moscow 115054 Secondary Analyst Federico Faccio Senior Director +44 20 3530 1394 Committee Chairperson David Prowse Senior Director +44 20 3530 1250 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available on Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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