Fitch: Quality of Azerbaijani AzInsurance’s investment portfolio moderately improves
Baku, Azerbaijan, Nov. 21
By Taleh Mursagulov - Trend:
Fitch Ratings, an international rating agency, has affirmed Azerbaijan's AzInsurance OJSC’s Insurer Financial Strength (IFS) Rating at 'B', the outlook is negative, reads a report by the rating agency.
“The affirmation reflects AzInsurance’s relatively strong capital position, its weak business profile and high, although improving, risk in the investment portfolio,” reads the report. “The negative outlook reflects the insurer's deteriorated underwriting performance in 2017 as well as uncertainty over the future reserves development and the ongoing reshuffle of the business mix.”
“AzInsurance has not yet completed the audit of its 2017 IFRS-based reporting,” the report said. “Fitch has only been able to review the audited regulatory reporting compiled in accordance with local accounting standards. The reserving adequacy is one of the key areas that could make a difference between the two reporting standards. Fitch believes that the reserving risk is higher in the local reporting as AzInsurance’s actuarial expertise is still developing and the regulatory reserving methodology is simplified and inflexible.”
In its regulatory accounts for 2017, AzInsurance reported a net loss of 3.1 million manats and a negative 10 percent return on equity (ROE) after a period of sound profitability, with an average ROE at 42 percent in 2013-2015 and a moderate 6 percent in 2016, Fitch noted.
The negative underwriting result with the combined ratio of 118 percent in 2017 was the key reason for the ROE weakening, as AzInsurance is still struggling to recover from the loss of its cargo insurance portfolio after the changes in the local operating environment, according to the report.
“Fitch notes that the quality of AzInsurance’s investment portfolio has moderately improved, but remains relatively low,” reads the report. “The insurer started to cede the management of approximately half of its investment assets to AzFinance Investment Company CJSC. As of end-September 2018, these assets were 62 percent invested in Azerbaijan government bonds and 38 percent in short-term repurchase agreements with the Ministry of Finance of Azerbaijan as the counterparty.”
A sustained improvement in AzInsurance’s financial performance could lead to a revision of the outlook to stable, according to the report.
Material adverse reserve developments emerging from the release of the audited 2017 IFRS-based accounts compared to the regulatory reporting could lead to a downgrade, said the report.
Follow the author on Twitter: @TalehMursagulov