TEXT-Fitch affirms OJSC Insurance Group MSK


(The following statement was released by the rating agency)

Oct 12 - Fitch Ratings has affirmed OJSC Insurance Group MSK's (IG MSK) Insurer FinancialStrength (IFS) rating at 'BB' and National IFS rating at 'AA-(rus)' and removed them from RatingWatch Negative (RWN). The Outlook on both ratings is Stable.

The rating actions follow the improvement, in Fitch's view, of IG MSK'sstrategic importance to one of its beneficiary shareholders, Bank VTB (VTB;'BBB'/Stable). The rating reflects Fitch's expectations of financial andoperational support for IG MSK from VTB. Following a change in ownershipstructure, VTB now holds operational control in OJSC Metropolitan InsuranceGroup (MIG), majority owner of IG MSK. This allows VTB to effectively control IGMSK's strategy. Following losses in 2011 in the insurance company, in 2012 BankVTB arranged for an increase in IG MSK's equity by RUB5.1bn. Without thesetangible signs of support, IG MSK's rating would be lower.

The capital increase, of which RUB3bn was paid in Q312, forms part of a recoveryprogramme introduced by VTB. It is aimed at reinvigorating the company andreturning it to profit by Q413. The equity injection does not represent a purecapital transfer from VTB, but comes from internal sources of MIG.

IG MSK's capital base was substantially eroded following the merger with CJSCSpasskie Vorota (SV) in Q211. Furthermore, the company remains highly exposed tonon-profitable motor lines in its portfolio. After the RUB3bn of funds wereinjected into the company, its capital position has significantly recovered, toa level that is now commensurate with the current rating. However, on arisk-adjusted basis, IG MSK's capital remains pressured, partly by holdings ofrelatively illiquid assets.

Fitch views positively the repayment of a large proportion of debt by IG MSK inQ411. This followed the sale of Bank of Moscow shares to VTB in the same year.Debt repayment brought the financial leverage down to 6% at end-6M12 from 50% atend-2010. The remaining debt is largely short term.

IG MSK's financial profile remains weak relative to the current rating. IG MSKreported a net accumulated loss of RUB7.5bn in its retained earnings at end-2011(2010: profit of RUB0.7bn). This largely results from its merger with SV, whichhad a significantly weaker financial profile and material reservingdeficiencies, disclosed by IG MSK after the merger. Additionally, IG MSK remainsfocused towards motor lines, which accounted for 80% of gross written premium in2011 (6M12: 81%). Net of exposure to reserving deficiencies of SV, IG MSK'scombined ratio was high in 2011 (120%) and 6M12 (114%). Fitch's analysis for6M12 was based on the company's unaudited accounts.

IG MSK's investment portfolio is in line with the rating level, but contains anumber of weak asset classes. Among these are relatively illiquid promissorynotes, investments in a closed-end investment fund and shares in affiliates.These assets accounted for 27% of the portfolio or 84% of equity at end-6M12.

Bank VTB fully controls IG MSK's operations through the board of directors andthe management team. However, it continues to share ownership in IG MSK's parentMIG, with minority shareholders controlling a significant share in MIG. Fitchunderstands that Bank VTB aims to achieve a majority shareholder control in thecompany in the short term.

Fitch would view a substantial improvement in IG MSK's financial positionpositively for the ratings. This includes further strengthening of the capitalbase, improvement in underwriting profitability and de-risking of the investmentportfolio.

The agency would view any signs of a decline in the strategic importance to itskey shareholder (Bank VTB), or weakening of Bank VTB's own credit profile asnegative for the rating.

((Bangalore Ratings Team, Hotline: +91 80 4135 5898satish.kb@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com,Reuters Messaging: satish.kb.thomsonreuters.com@reuters.net))