OREANDA-NEWS. Fitch Ratings has assigned AzInsurance OJSC (AzInsurance) an Insurer Financial Strength (IFS) rating of 'B+'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects high investment risk on AzInsurance's balance sheet, the correspondingly weak capital position on a Fitch risk-adjusted basis, demanding profit repatriation by its shareholder, and material exposure to catastrophe risk. The rating also takes into account of a strong market position and related strong profitability, mainly from AzInsurance's core insurance operations.

AzInsurance has significant concentration risk. Cash and bank deposits with related party banks accounted for 56% of AzInsurance's investments at end-2014, leading to high affiliated investment leverage of 69%. The other significant concentration is the covered bonds of Azerbaijan Mortgage Fund (BBB-/Stable), a government agency, which represented 31% of the insurer's investments at end-2014.

AzInsurance is owned by a local businessman and benefits from its strong ties with Gilan Holding, a large diversified local group managing projects in construction, banking, tourism and other industries. The insurer holds an exclusive position in a few segments of the local insurance sector and has high bargaining power. This exclusive position translates into strong underwriting profitability. In 2010-2014 its average combined ratio was 51%, supported by low acquisition costs. Its return on average equity (ROAE) for this period was a strong 53%, driven by underwriting profit, albeit declining to 35% by 2014.

Since 2013 the shareholder has started to take sizeable dividends. The ratio of dividends paid in 2013-2015-to the net profit of 2012-2014 was 99%. Fitch understands from management that the shareholder takes into account the insurer's robust regulatory capital position (solvency margin at 537% at end-2014) when deciding on dividend policy.

Based on Fitch's Prism factor-based capital model, AzInsurance's risk-adjusted capital score is below 'somewhat weak' based on 2014 results, and unchanged from 2013. Its risk-adjusted capitalisation benefits from fairly low premium volumes but is constrained by the large concentration and fairly low quality of the investment portfolio.

Azerbaijan is exposed to natural catastrophic risks, with the worst scenario being an earthquake in Baku, the largest city of the country. AzInsurance covers domestic homeowners' property risks (a compulsory line) and is also exposed through its commercial portfolio in Baku. According to an independent assessment made at end-2013, a 1-in-250 year earthquake could result in AZN39m (USD37m) gross loss for AzInsurance. Currently available reinsurance protection would cover up to USD15m.

AzInsurance is a major Azerbaijani non-life insurer, underwriting both the commercial and retail businesses. It has a particularly strong presence in the insurance of imported cargo, the 'green card' segment of the motor third-party liability insurance, and compulsory homeowners' property insurance. Positively, even excluding the most profitable cargo line (30% of gross written premium in 2014), AzInsurance still generates significant underwriting profit.

RATING SENSITIVITIES
Improved quality and diversification of the investment portfolio and reduced pressure of asset risks on the risk-adjusted capital position could lead to an upgrade. Conversely, capital depletion due to investment losses could result in a downgrade.

Strong premium growth accompanied by sound underwriting profitability and improving diversification across business lines could lead to an upgrade. Strengthening of the underwriting claims settlement, reserving and other risk management processes as part of growth management would also be positive rating factors. Conversely, a weakening of the underwriting performance could result in a downgrade.

A significant weakening of the insurer's market position or its bargaining power could also result in a downgrade.