Fitch Ratings has upgraded VTB Insurance insurer financial strength (IFS) rating to ‘BBB-‘ from ‘BB’ and National IFS Rating to ‘AA+(rus)’ from ‘AA-(rus)’. The outlook is stable.
The upgrade reflects Fitch’s view of the increased strategic importance of VTBI to its 100% parent Bank VTB (‘BBB’/Stable). Fitch has raised VTBI’s status to ‘Very Important’ from ‘Important’ and concluded that a one-notch difference between the parent and the subsidiary is appropriate, as per the agency’s group rating methodology.
Assignment of ‘Very Important’ status reflects improved levels of synergy between the group’s banking and insurance operations, strengthening of VTBI’s stand-alone financial profile and crystallisation of VTBI’s medium-term strategic focus, which is largely on bancassurance rather than on dynamic growth in the open market.
The one notch difference between VTBI’s and Bank VTB’s ratings reflects the insurer’s relative small size in terms of assets and profit contribution for the group, as well as good prospects for greater synergies, particularly taking into account the acquisitions recently made by Bank VTB in the Russian banking sector.
VTBI has recorded a second consecutive year of strong operating performance, with return on adjusted equity (ROAE) rising to 72% in 2010 from 57% in 2009 with the underwriting result being the key driver of strong results in both years. Fitch understands that this is a result of Bank VTB’s deliberate decision to allow the insurer to write profitable business at low acquisition costs through its bancassurance channel and thus retain profit at the insurer’s level. This profit can be repatriated to the parent level in the form of dividends later, although Fitch has been advised that Bank VTB does not plan to withdraw dividends, at least in the near term. Meanwhile, VTBI has scheduled a share capital increase through the retained profits to RUB1.5bn from RUB0.5bn by end- 2011.
Bank VTB has recently acquired a significant minority stake and operational control in Insurance Group MSK (IG MSK; ‘BB’/RWN). This transaction formed part of a larger deal when Bank VTB acquired a 46.48% stake in the Bank of Moscow (‘BBB-‘/RWN) from the City of Moscow at the end of February. IG MSK was of interest to Bank VTB due to its cross-holding with Bank of Moscow. Bank VTB expects to increase its participation in IG MSK to a majority one in the near term.
IG MSK was three times larger than VTBI by premiums written in 2010, but significantly weaker in terms of underwriting performance, primarily due to the higher exposure to the motor business and execution risks related to the two mergers conducted by IG MSK in Q110 and Q211. At present, Bank VTB is in the process of scrutinising IG MSK’s insurance portfolio and balance sheet and plans to announce its strategic decision on the insurer’s development in the next few months. Fitch understands that a merger between VTBI and IG MSK is unlikely in the near to medium term, at least until IG MSK restores profitability. Fitch believes that VTBI retains a higher strategic importance among Bank VTB’s insurance holdings despite its smaller size due to the shared brand name, achieved integration with the group banking operations and strong stand-alone operating performance.
VTBI’s ratings are likely to move in line with the parent’s ratings. However, the ratings linkage with the parent could change if Fitch believes that VTBI no longer has ‘Very Important’ status for Bank VTB, under the agency’s group rating methodology. This could happen, for example, if VTBI were to focus on aggressive growth in the open market and failed to meet profitability targets set by the parent.
VTBI’s ratings could be fully aligned with the parent’s ratings if VTBI achieves materiality in size relative to the parent’s gross assets or net income, and/or achieves greater synergies with the group’s banking operations. Fitch believes this is unlikely to be achieved in the near to medium term, but is a realistic expectation in the longer term.
VTBI is a medium-sized Russian non-life insurer with gross premiums written of RUB5.6bn in 2010 and gross assets of RUB4.5bn at end-2010.
Source : Fitch Ratings
