Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based Uzagrosugurta Joint-Stock Company’s and its life subsidiary Agros Hayot Joint-Stock Insurance Company’s (Agros Hayot) Insurer Financial Strength (IFS) Ratings at ‘BB-’. The Outlooks are Stable.

The affirmation reflects Uzagrosugurta’s continuing state ownership (Uzbekistan; Long-Term Local-Currency Issuer Default Ratings (LTLC IDR): BB-/Stable). In addition, the rating reflects the insurer’s systemic role in the agricultural sector in the country.

Uzagrosugurta’s standalone credit quality reflects its improved capital position, profitable but volatile financial performance and high investment risk. The insurer also has significant catastrophe exposure in its agricultural portfolio, although this risk is partly mitigated by the availability of the government’s stop-loss facility.

Agros Hayot’s rating reflects its ‘Core’ status to its sole shareholder Uzagrosugurta, which results in the equalisation of their IFS Ratings.

KEY RATING DRIVERS

Ownership Drives Rating: Uzagrosugurta is 94.6% state-owned through the State Assets Management Agency of the Republic of Uzbekistan. The government plans to divest a 2% stake via an initial public offering by end-2023. We expect the government to retain control via its majority stake in the insurer due to its systemic importance in agricultural insurance. Fitch is likely to view this transaction as neutral to rating, if the government remains the key shareholder and the company remains systemically important.

‘Core’ Status of Agros Hayot: Fitch views Agros Hayot as ‘Core’ to its 100% parent Uzagrosugurta. Agros Hayot remains an integral part of the group in supporting development goals set by the state. This assessment is supported by brand sharing, strong history of support, synergies through the offer of a full range of non-life and life products to the same franchise base and its unlikely divesture.

On a standalone basis, Agros Hayot has a record of weak operating performance and is exposed to heightened business profile risks posed by a legislative change cancelling tax incentives for policyholders on savings products. Like its peers, Agros Hayot is likely to face a severe slowdown in premium growth after the legislative changes came into force on 1 April 2023, which is likely to affect Agros Hayot’s business profile assessment.

Significant Revaluation Reserve Supports Capital: Uzagrosugurta’s capital position, as measured by Fitch’s Prism Factor-Based Model (FBM), improved to ‘Strong’ at end-2022 from ‘Adequate’ at end-2021. The capital strengthening was mainly due to the positive revaluation of its fixed assets amounting to UZS306 million, which accounted for 71% of shareholders’ funds at end-2022, and which we view as of inferior quality. The insurer’s regulatory solvency margin remained sound at 139% at end-2022, in line with 143% at end-2021.

Weak but Profitable Financial Performance: Uzagrosugurta’s financial performance was weak but profitable. Its net income return to equity of 1.5% and of 3% in 2022 and in 2021, respectively, was mainly supported by strong investment and, to a lesser extent, by a positive life result.

Its underwriting profitability, based on a combined ratio of 107% and of 113% in 2022 and in 2021, was weak. The insurer is subject to burdensome administrative expenses stemming from a dense branch network and, to a lesser extent, heightened acquisition expenses. The latter is due to the company’s ambitious strategy to expand its non-agricultural portfolio via active participation in inwards reinsurance agreements in lines of business with fairly high commissions. However, Uzagrosugurta plans to optimise its cost structure partially by disposing of some fixed assets including some offices of its branch network.

High Investment Risk: The insurer mainly invests in bank deposits placed with a fairly large number of state-owned local banks, which accounted for 66% of total invested assets at end-2022. At the same time, we believe that the company’s ability to achieve better diversification is limited by narrow available investment opportunities.

No Catastrophe Risk Modelling: Like its local peers, Uzagrosugurta is exposed to catastrophe risk. No quantitative studies have been done by the company or its potential international reinsurance counterparties yet. The company is highly vulnerable to natural catastrophes that might affect crops and other business lines. The exposure is partially offset by a stop loss facility provided by the government.