The rating is equalised with Uzbekistan’s ‘BB-‘ Long-Term Local-Currency Issuer Default Rating (IDR). The equalisation reflects Uzagrosugurta’s state ownership, its systemic role in the agricultural sector, a major part of the local economy, the availability of a stop-loss facility for crop insurance from the government and the history of capital support extended to the insurer.
Uzagrosugurta is 94.6%-owned by the Ministry of Finance of the Republic of Uzbekistan, which obtained its share back from the Agency for Management of State Assets of the Republic of Uzbekistan, a government agency established to consolidate and manage various state-owned enterprises. Uzagrosugurta focuses on providing insurance coverage to the agricultural industry, which remains a key contributor to GDP in Uzbekistan. It also manages a diversified portfolio of traditional non-life risks. Uzagrosugurta’s systemic role is supported by a number of regulations, including a stop-loss facility limiting its share in claims made on cotton and grain crop insurance policies to 80% of the line’s premiums written.
The government plans to offer a significant minority stake in Uzagrosugurta to strategic investors to help the insurer strengthen its expertise, enhance the corporate governance standards and also attract additional capital. Nevertheless, Fitch currently expects the government will retain its control over the insurer due to its role in agricultural insurance. Fitch would view this transaction as credit neutral if Uzagrosugurta remains state-controlled and of systemic importance for the sector.
Uzagrosugurta’s standalone profile is relatively weak and reflects a stretched capital position, volatile underwriting result, favourable business profile and low credit quality of the investment portfolio. The insurer also has significant catastrophe exposure in its agricultural portfolio, although this risk is mitigated by the availability of the government stop loss facility.
Uzagrosugurta’s risk-adjusted capital score, as measured by Fitch’s Prism Factor-Based Model (FBM), improved to ‘Somewhat Weak’ at end-2020 from ‘Weak’ at end-2019 due to strong profit generation in 2020 and a reduction in business volumes. From a regulatory point of view, Uzagrosugurta is adequately capitalised with a regulatory solvency margin, calculated based on a Solvency-I formula, at 2.07x at end-2020 and 1.68x end-6M21. However, this formula does not take asset risk into consideration.
In 2020 Uzagrosugurta reported a profitable non-life underwriting result, with the combined ratio of 96% in 2020, an improvement from 105% in 2019, due to a notable reduction in administrative expenses. Uzagrosugurta continued to have a relatively high expense ratio due to its dense branch network in 2020, although the insurer has significantly improved this level from 2019. The insurer’s relatively high expenses suggest that it may have limited flexibility to respond to a tightening in competition or higher vulnerability to adverse developments in the portfolio.
Fitch views the company’s investment risk as high relative to mature markets. Uzagrosugurta is exposed to significant equity instruments at 34% to total shareholders’ funds at end-2020. The remaining investments are fixed-income instruments in the form of bank deposits, which are reasonably well-diversified and mainly placed with state-owned banks. Fitch notes that Uzagrosugurta’s ability to improve diversification is constrained by the narrowness of the local investment market.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-A one-notch upgrade of Uzbekistan’s Long-Term Local-Currency IDR.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-A one-notch downgrade of Uzbekistan’s Long-Term Local-Currency IDR.
-A significant change in Fitch’s view of Uzagrosugurta’s relations with the government.
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories range from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
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