Fitch revises VTB Insurance outlook to positive

Fitch Ratings has revised the outlook of Russian VTB Insurance to positive and affirmed its ratings at insurer financial strength 'BB' and National IFS 'AA-(rus)'.

The outlook change reflects VTBI's strengthened standalone profile, which includes improvement of its operating performance and capital position through internal sources.

The ratings continue to reflect ongoing support from the 100% shareholder, state-owned Bank VTB ('BBB'/Stable), Russia's second-largest bank by assets and equity, access to the parent's distribution network and a good quality investment portfolio. The ratings also take into account the challenges in managing VTBI's rapid premium growth, relatively short track record of sustainable operations and competitive operating environment.

Fitch said VTBI's operating performance has improved considerably, with the return on adjusted equity rising to 57% in 2009 compared with negative results between 2005 and 2008. This strengthening has primarily been a result of the improved underwriting performance, but has also been supported by favourable investment yield.

A notable improvement of the underwriting result in 2009 was driven by a decline in acquisition costs following changes in the business mix and also by a decline in administrative expenses amid rapid growth of premium volume.

At the same time, the loss ratio deteriorated slightly, reflecting two opposing trends in the insurance portfolio. On one hand, one of the most profitable lines - accident - has doubled its weighting in the portfolio to 26% in 2009. On the other hand, a number of other key lines of business demonstrated deterioration in their loss ratios.

According to Fitch's internal assessment, VTBI's net income for 2009 has helped strengthen its capital position through internal sources for the first time in the company's history. The shareholder does not plan to make further injections in the medium term, but remains committed to support the insurance subsidiary, should the need arise.

Fitch notes that VTBI is already prepared to meet new regulatory capital requirements that come into force from 2012. The agency also notes that the insurer has a strong liquidity position and a good quality investment portfolio, with 99% placed in cash and bank deposits at FYE09, although with significant concentrations at the parent bank.

The 7% contraction of the local insurance sector in 2009 did not prevent dynamic growth in VTBI's premiums, which increased 53% in 2009, albeit slower than the levels seen in 2007 and 2008. This achievement was largely a result of the insurer's captive position and increased use of the parent group's distribution channels. VTBI projects to grow by 40% a year over the medium term.

Fitch notes that these plans are rather ambitious and is concerned about the insurer's ability to monitor the loss development and manage reserve and capital adequacy accordingly, particularly taking into account the recent unfavourable trends in the loss ratios of some of the insurer's key lines of business. To some extent, these concerns are mitigated by the ability and commitment of the shareholder to support VTBI as well as the restructuring of the underperforming parts of the business commenced in 2010.

VTBI focuses on primary non-life insurance written in Russia. In 2009 64% of its premiums were derived from the parent bank's distribution channel. Its gross premiums written amounted to RUB3.6bn in 2009, and its total assets stood at RUB2.9bn at FYE09.