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 Financial Strength (IFS) rating at 'BB' and National IFS rating at 'AA-(rus)' and removed them from Rating Watch Negative (RWN). The Outlook on both ratings is Stable.

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

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

IG MSK's capital base was substantially eroded following the merger with CJSC Spasskie Vorota (SV) in Q211. Furthermore, the company remains highly exposed to non-profitable motor lines in its portfolio. After the RUB3bn of funds were injected into the company, its capital position has significantly recovered, to a level that is now commensurate with the current rating. However, on a risk-adjusted basis, IG MSK's capital remains pressured, partly by holdings of relatively illiquid assets.

Fitch views positively the repayment of a large proportion of debt by IG MSK in Q411. 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% at end-2010. The remaining debt is largely short term.

IG MSK's financial profile remains weak relative to the current rating. IG MSK reported 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, which had a significantly weaker financial profile and material reserving deficiencies, disclosed by IG MSK after the merger. Additionally, IG MSK remains focused towards motor lines, which accounted for 80% of gross written premium in 2011 (6M12: 81%). Net of exposure to reserving deficiencies of SV, IG MSK's combined ratio was high in 2011 (120%) and 6M12 (114%). Fitch's analysis for 6M12 was based on the company's unaudited accounts.

IG MSK's investment portfolio is in line with the rating level, but contains a number of weak asset classes. Among these are relatively illiquid promissory notes, 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 and the management team. However, it continues to share ownership in IG MSK's parent MIG, with minority shareholders controlling a significant share in MIG. Fitch understands that Bank VTB aims to achieve a majority shareholder control in the company in the short term.

Fitch would view a substantial improvement in IG MSK's financial position positively for the ratings. This includes further strengthening of the capital base, improvement in underwriting profitability and de-risking of the investment portfolio.

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

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