Fitch Ratings-Moscow-13 January 2012: Fitch Ratings has upgraded ACE Insurance Company CJSC (Russia)'s (ACE Russia) Insurer Financial Strength (IFS) rating to 'BBB+' from 'BBB-' and National IFS rating to 'AAA(rus)' from 'AA+(rus)'. The Outlooks are Stable.
The upgrades reflect Fitch's increased confidence about ACE Group's willingness to support ACE Russia after the capital increase in Q311 and ACE Russia's improved contribution to the group's bottom line in 2010 and 9M11. The upgrade therefore also incorporates the increased contribution of the parent support to the rating and is in accordance with the principles set out in Fitch's group rating methodology.
ACE Russia is part of the ACE Group, a global insurer and reinsurer. The insurer was established as a separate legal entity solely because the Russian legislation does not permit cross-border primary insurance through branches. The ultimate parent of the group is ACE Limited, domiciled in Switzerland (Long-term IDR 'A+'/Stable). ACE Russia has received capital support from the group whenever required. The insurer also benefits from the group's advice and close monitoring in all key areas, including underwriting, reinsurance, claims, actuarial, investment and IT advice.
In accordance with its rating criteria, Fitch views ACE Russia as standing at the 'Important' level of strategic importance within the group. This is based on the deep integration of the operations, shared brand name, sustainable track record of support and aligned corporate governance and risk management procedures. An improvement of the status to 'Very Important' is constrained by the small size of the Russian subsidiary relative to the group.
On a standalone basis, ACE Russia would be rated more than six notches below the parent. Fitch also considers that capital is fungible between the parent and ACE Russia. The agency has therefore decided to apply a partial attribution approach and reduced the difference between the group assessment and the standalone assessment (benchmarked to IFS) to a minimum of four notches in accordance with the agency's criteria. This reduction was based on the sustainable track record of support and the strengthened performance of the subsidiary in the past two years.
Assessed on a standalone basis, ACE Russia has been generating a moderately positive operating result in the past three years with underwriting losses being offset by investment income. Excluding the effects of intra-group reinsurance and considered as if it was a branch, ACE Russia demonstrated significantly stronger underwriting results and made a more material contribution to ACE's Continental Europe division's bottom line than in its top line in 2010-9M11.
ACE Russia's shareholders increased the insurer's statutory capital to RUB480m from RUB150m in Q311 to secure compliance with new local regulatory requirements that come into force in 2012. Fitch expects that the group will continue to extend capital support to ACE Russia when required.
According to Fitch's internal assessment, ACE Russia's risk-adjusted capital strength is very strong and is more than supportive of the insurer's rating level. Capital appears to be somewhat excessive relative to net business volume and strong balance sheet, but nevertheless is kept at the insurer's level for the regulatory purposes. Fitch views positively the shareholders' decision not to significantly increase levels of net retention or target business volume for ACE Russia following the capital increase.
Fitch would view any weakening in the level of parent support to ACE Russia as a key trigger for a downgrade.
If ACE Russia maintains sustainable and profitable growth of its insurance portfolio and achieves a more significant scale relative to the ACE Group, Fitch could view it as a trigger for upgrade. The agency does not expect the insurer to reach this target in the medium term.