Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has assigned Uzbekistan-based Uzagrosugurta Joint-Stock Company an Insurer Financial Strength (IFS) rating of ‘BB-’. The Outlook is Stable.

The rating is support-driven and equalised with Uzbekistan’s Local Currency Long-Term Issuer Default Rating (IDR) of ‘BB-’. The equalisation reflects Uzagrosugurta’s indirect ownership by the state and the insurer’s systemic role in the agricultural sector, a major part of the local economy. The rating also takes into account the availability of a stop-loss facility for crop insurance from the government from June 2019 and the recent record of capital support extended to the insurer.

Fitch believes that Uzagrosugurta’s standalone profile is weak, reflecting a weak risk-adjusted capital position and potentially high reserving risk on prior-year business.

Uzagrosugurta is 94%-owned by the Agency for Management of State Assets of the Republic of Uzbekistan, a government agency established in January 2019 to consolidate and manage various state-owned enterprises. Since its inception in 1997, the insurer has been state-owned. Uzagrosugurta focuses on providing insurance coverage to the agricultural industry, which remains a key contributor to GDP in Uzbekistan (28.8% in 2018 according to the World Bank), but also manages a diversified portfolio of traditional non-life risks.

Uzagrosugurta mainly underwrites cotton and grain crop insurance, while livestock traditionally bred in small farms remains uninsured. Fitch believes that cotton and grain are systemically important to the Uzbek economy due to the high proportion of occupied agricultural land in the country, the scale of rural labour resources, food security reasons, and for its further contribution to GDP through the manufacturing of the cleaned cotton and textiles.

The Uzbek government has declared its strategic commitment to help the agricultural industry modernise in 2020-2030 without causing shocks to the related working population or the economy. It is likely to continue extending various types of support, including subsidised loans, insurance and other instruments. This supports our view of Uzagrosugurta’s systemic role.

Based on the Uzbek government decree signed in June 2019, Uzagrosugurta’s share in claims made on cotton and grain crop insurance policies will be limited going forward to 80% of the line’s premiums written. Anything over 80% will be refunded to the insurer by the government. The government subsidy was introduced for Uzagrosugurta after the insurer recorded major crop-related losses in 2017 and 2018.

Additionally, crop insurance has become a covenant for cotton and grain farms to obtain state-subsidised loans, which means that Uzagrosugurta will have a high penetration rate in the relevant risk pool. Fitch understands that in the absence of government support, crop insurance could become too expensive or unavailable to farmers.

Uzagrosugurta has a weak capital position. The insurer’s equity was restored from negative values at end-2017 through a UZS82 billion capital injection from the government, which also indicates the government’s strong willingness to support the company.

Fitch believes that reserving risk might be high for Uzagrosugurta, given its very limited claims statistics of proper quality, immature IT systems, developing actuarial expertise and simplistic regulatory reserving methodology.

Uzagrosugurta’s IFS rating will likely reflect any changes in Uzbekistan’s Long-Term Local-Currency IDR.

Any significant change to Fitch’s view of Uzagrosugurta’s relations with the government would lead to a downgrade of the rating.