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Fitch Upgrades VTB Insurance to 'BBB'; Outlook Negative

August 15, 2013 | Fitch Ratings

Fitch Ratings has upgraded Russia-based VTB Insurance Limited's (VTBI) Insurer Financial Strength (IFS) rating to 'BBB' from 'BBB-' and National IFS rating to 'AAA(rus)' from 'AA+(rus)'. The Outlooks are Negative.
KEY RATING DRIVERS
Fitch has aligned VTBI's ratings with those of its 100% owner, Bank VTB (BBB/Negative). The alignment reflects the agency's strengthened view of VTBI as the bank's main insurance arm. This is supported by the insurer's increasing contribution to the parent's net result and the insurer's broad achievement of the targets set by the parent. The Negative Outlook on the VTBI's rating continues to mirror that on Bank VTB's rating.
VTBI's contribution to Bank VTB's consolidated net income significantly increased to 5.4% in 2012 from 2.1% in 2011 with the bulk of this contribution coming from insurance underwriting profits (rather than investment or other income).
The insurer's return on adjusted equity (ROAE) improved to 92% in 2012 from 63% in 2011 based on the insurer's IFRS reporting. The insurer's underwriting result has remained the key source of net income generation, although there was some weakening of VTBI's combined ratio to 70% in 2012 from 60% in 2011 driven by the loss component. Half-year reporting based on the local accounting standards indicates only a moderate deterioration of the ratio to 67% in H113 from 65% in H112. Larger volumes of business also contributed to stronger profits.
Although the extent to which the insurer remains profitable largely depends on Bank VTB, the agency understands that it is a deliberate decision of Bank VTB to allow its insurance subsidiary to write business at low acquisition costs compared with the average level of such costs in the Russian insurance sector. The agency does not expect this to change, at least in the near term.
Bank VTB received substantial dividends of RUB2.1bn and RUB3bn in 2012 and 2013, respectively. The insurer started to pay dividends only after it achieved relative maturity in its portfolio and demonstrated robust profitability in several consecutive years. In H113, the profit remaining after the dividend payment was used to increase share capital, which means that it cannot be used later to pay dividends.
The dividend payment and dynamic growth of business volumes weakened VTBI's capital position, on both Fitch's own risk-adjusted assessment and a regulatory basis. However, Fitch believes that Bank VTB would extend support to the insurer in case of need.
VTBI reported a strong underwriting result in 2012 in a context of extremely rapid growth (170%) in business volumes. This growth enabled insurer to become one of the ten largest local insurers by premiums written for the first time.
Approximately half of the improvement in VTBI's market share of new business was due to a single large contract signed in 2012. This RUB8.2bn accident contract with the Russian Ministry of Internal Affairs was effectively written on compulsory terms set by the government and the Ministry, with the insurer having limited underwriting and claims handling control. Fitch does not have information on the level of the loss ratio for this particular contract but understands that it was the key driver behind the deterioration of the insurer's loss ratio to 56% in 2012 (2011: 36%).
The contract was renewed in 2013. Fitch expects that the contract's individual loss ratio may deteriorate in 2013 due to unfavourable changes in the terms imposed by the Ministry. However, the expected decrease of the contract's weight in the insurer's GWP to 30% in 2013 from 37% in 2012 may partially reduce pressure on the insurer's overall underwriting result.
While the renewal of this contract affects the insurer's market share, it does not appear to have any material effect on its bargaining power in its core bancassurance lines and, therefore, in the case of non-renewal is unlikely to damage the insurer's bottom line.
RATING SENSITIVITIES
VTBI's ratings will continue to mirror Bank VTB's ratings.
A downgrade is possible if Fitch considers VTBI to be less significant for the group. This change in view could be triggered by the insurer's failure to meet the parents' expectations in relation to key strategic targets.

Company: VTB Insurance

Full company nameLimited liability company «VTB Insurance»
Country of riskRussia
Country of registrationRussia
IndustryFinancial institutions

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