OREANDA-NEWS. Fitch Ratings has assigned Russia-based JSC IC Allianz (Allianz Russia) an Insurer Financial Strength (IFS) rating of 'BBB-' with Negative Outlook and a National IFS rating of 'AAA (rus)' with a Stable Outlook.

KEY RATING DRIVERS

The IFS rating is based on 100% ownership of Allianz Russia by Allianz SE (IFS AA/Stable), one of the world's largest insurance groups but capped by Russia's sovereign Long-Term Local Currency Issuer Default Rating (IDR) of 'BBB-'. The rating also takes into account Allianz Russia's weak standalone capital position and operating performance. The Negative Outlook mirrors that on Russia's sovereign Long-Term Local Currency IDR.

Fitch views Allianz Russia as strategically 'Important' to Allianz SE based on Fitch's insurance group rating methodology. This view is supported by the track record of parent support and its strategic commitment to maintaining a direct presence in Russia. The Russian subsidiary makes a very small contribution to the total assets and premiums written of Allianz SE, but is important in terms of maintaining the franchise of Allianz group in Russia.

Having completed a major restructuring of the portfolio, from 2016 Allianz Russia will focus on commercial property and casualty, marine, aviation, transport and financial risks insurance. A significant part of this portfolio would be represented by the coverage of Russian customers of Allianz's multinational commercial policyholders. Allianz Russia will also aim to increase penetration in coverage of purely domestic risks, using its strong brand name and the broad reinsurance capacities of the parent as competitive advantages. Any decision to resume motor, and more broadly retail underwriting, is now subject to reduced risks in the regulatory framework and operating environment, but Allianz does not see this as a likely scenario in the medium term.

Allianz Russia's capitalisation, measured under Fitch's Prism factor-based capital model (Prism FBM), is below 'Somewhat Weak' based on 2014 and 2015 results. The insurer has received substantial capital injections from the parent in 2013-2015, which helped to prevent capital depletion by motor underwriting losses but did not strengthen the risk-adjusted capital position. Fitch does not expect a notable strengthening of Allianz Russia's FBM score in 2016 as the insurer plans to reduce capital through a dividend payment. Allianz Russia is compliant with local regulatory capital requirements, with a Solvency1-like ratio at 210% at end-2015. Allianz Russia plans to maintain regulatory solvency above 200% even after the dividend payment scheduled for 2H16.

The insurer reported negative returns on equity (ROE) of 48% in 2015 and 233% in 2014. Major reserve strengthening on motor lines led to a weak underwriting result in 2013-2014 and was not mitigated by investment income. As a result, the net loss fully depleted Allianz Russia's available capital, resulting in shareholder support for the Russian subsidiary.

In 2015 reserve strengthening was largely completed but the underwriting result was negatively impacted by a larger loss ratio for financial risks and reduced positive contribution of the commercial property line, and the increased burden of administrative expenses relative to premium.

Allianz Russia's motor portfolio has been in a run-off since December 2014, due to weak performance. Allianz's market share in the Russian motor insurance in 2014 was only 3.4%. The run-off, which is strongly supported by Allianz SE, has been and is expected to be orderly. Additionally, in February 2016 the group completed the sale of Allianz Russia's voluntary health insurance portfolio to its sister company - Allianz Life Insurance Company, Russia, also owned by Allianz SE. Health insurance accounted for 59% and 74% of Allianz Russia's written premiums on a gross and net basis, respectively, in 2015.

RATING SENSITIVITIES

A change in Russia's Long-Term Local Currency IDR would lead to a change in Allianz Russia's international IFS rating.

A decline in the parent's willingness to support the Russian subsidiary, or a reduction in its strategic importance to the parent would likely result in a downgrade.