Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based Uzagrosugurta Joint-Stock Company’s Insurer Financial Strength (IFS) Rating at ‘BB-’. The Outlook is Stable.

The affirmation reflects Uzagrosugurta’s continuing state ownership (Uzbekistan; Long-Term Local-Currency Issuer Default Ratings (IDR): BB-/Stable). In addition, the rating reflects a record of capital support by the Uzbek state and the insurer’s systemic role in the agricultural sector in the country.

Uzagrosugurta’s standalone credit quality reflects its weak capital position, profitable but volatile financial performance, and high investment risk. The insurer also has significant catastrophe exposure in its agricultural portfolio, although this risk is partly mitigated by the availability of the government’s stop-loss facility.

Ownership Drives Rating: Uzagrosugurta is 94.6% state-owned through the Ministry of Finance. The government plans to divest a significant minority stake in Uzagrosugurta to a strategic investor by end-2023. We expect the government to continue to own the majority stake in the company, and hence to retain control over the insurer due to its systemic role in agricultural insurance. Fitch would view this transaction as credit-neutral if Uzagrosugurta remains state-controlled and systemically important.

Weak Capital Position: Fitch assesses Uzagrosugurta’s capital position as weak. Its regulatory solvency margin deteriorated to 143% at end-2021, and remained at this level at end-1H22, compared with 207% at end-2020. This was due to significant premium growth mainly in inwards insurance, a new business line for the company.

Uzagrosugurta scored ‘Adequate’ at end-2021 under Fitch’s Prism Factor-Based Model, an improvement from ‘Somewhat Weak’ at end-2020. The strengthening was due to decreased risk retention (inwards reinsurance is mainly ceded abroad), which helped to ease pressure on target capital, and to significant profit generation, which helped support available capital.

Exposure to Catastrophe Risk: Uzagrosugurta’s capital is exposed to catastrophe risk which, however, is not quantified. Like its local peers, Uzagrosugurta does not conduct any internal assessment of the possible maximum catastrophe exposure on its business portfolio. This risk is partially mitigated by the presence of a stop-loss facility provided by the government for agricultural insurance.

Profitable but Volatile Financial Performance: In 2021 Uzagrosugurta reported a positive but declining net result, as manifested in a net income return on equity (ROE) of 3%, down from 22% in 2020. This was mainly driven by a worsened underwriting result, as reflected in a higher combined ratio of 113% in 2021, versus 96% in 2020.

The worsened underwriting profitability was mainly due to burdensome administrative expenses stemming from the company’s dense network branch and ambitious plans to expand its non-agricultural portfolio. However, Uzagrosugurta’s loss ratio improved to 16% in 2021 from 45% in 2020, mainly due to the company’s decision in 2021 to diversify its portfolio to more profitable lines such as commercial property and mortgaged properties. The company also substantially reduced its exposure to a number of loss-making lines.

High Investment Risk: Uzagrosugurta’s investment portfolio is dominated by bank deposits placed with a fairly large number of state-owned and large private banks mainly in the ‘B’ and ‘BB’ rating categories. The company also has sizeable equity instruments - 21% of total invested assets at end-2021. Although these instruments are formally traded on the local stock exchange, Fitch views them as of low liquidity due to their modest transaction volumes. At the same time, we believe the company’s ability to achieve better diversification by instrument or by issuer is limited by narrow investment opportunities in Uzbekistan.