ArmInfo.Moody's Investors Service ("Moody's") has today assigned Ba3 foreign and local-currency insurance financial strength ratings (IFSRs) to Export Insurance Agency of Armenia ICJSC (EIA).
The outlook is stable. EIA's Ba3 IFSRs reflect (1) its b1 Baseline Credit Assessment (BCA), and (2) moderate probability of support from the government of Armenia (Ba3 stable), resulting in a notch uplift above the BCA. This is noted in a message posted on the official website of Moody's, where it is indicated that the assignment of this rating to the Export Insurance Agency of Armenia is dated January 19 of this year.
Stable outlook
The stable rating outlook on EIA's IFSR is in line with the stable outlook on Armenia's Ba3 sovereign rating. It also reflects Moody's expectation that EIA will maintain its current financial metrics within the next 12-18 months.
Ratings rationale
EIA is currently the only export insurance company in Armenia. It was established by the government to promote Armenian export within the framework of the export-oriented industrial policy of the republic of Armenia.
EIA's b1 BCA benefits from its solid capital adequacy relative to net total exposure with 90% of insurance risk reinsured by Swiss Reinsurance Company Ltd (Swiss Re, Aa3 stable), as well as sound financial flexibility and low financial leverage. At the same time, these strengths are tempered by the company's modest size in global terms, low granularity of its insurance book and limited geographical diversification, investments in high-risk assets in Armenia and weak underwriting profitability.
EIA provides export and pre-export credit insurance against political and commercial risks. Its share in GPW of credit insurance sector in Armenia (including loan insurance and other financial losses insurance) amounted to around 50% as of Q3 2021.
The insurer's diversification is constrained by its limited geographical and products diversification with some sizeable single-name exposure. It has concentrations of export exposure in Russia (Baa3 stable), given the structure of Armenia's exports and long-standing relations with Russia.
EIA's asset-quality metrics reflect a high concentration of its investments in domestic assets, which mainly comprise current accounts and deposits with Armenia-based banks and investments in local bonds issued by the government of Armenia. The company's high-risk investments, mainly deposits with local banks, accounted for around 138% of its equity as of 31 December 2020.
The insurer has strong capital adequacy benefitting from the significant portion of insurance risk exposure reinsured by Swiss Re. The company's shareholders' equity as a proportion of total assets (equity-to-assets ratio) has been consistently high at above 60%. EIA's underwriting leverage is robust at 0.02x as of end 2020 compared with that of global peers, driven by a low level of insurance risk relative to its capital.
EIA's underwriting profitability is weak with its credit insurance combined ratio of 162% in 2020, albeit the trend is improving. Poor underwriting profitability reflects the company's still low scale of business operations and challenging operating environment in Armenia.
The assignment of new ratings to EIA also takes into account the effectiveness of its governance as part of Moody's assessment of environmental, social and governance (ESG) considerations. Moody's does not have any particular governance concerns for EIA.
Government support
Moody's assigns a moderate probability of government support resulting in a one notch uplift above EIA's BCA. This is based on the current full ownership of EIA by the Government of Armenia (Ba3 stable) and its public policy role in promoting Armenian export within the framework of the Export-Oriented Industrial Policy of the Government of Armenia. In the future the government has indicated that it may seek investment from international investors, but the state will continue to hold a controlling stake of not less than 51%. EIA's Chair of the Board of Directors is Deputy Minister of Economy three out of seven board members are representatives from the Ministry of Economy. There is no track record of government support in terms of provided guarantees or capital increase.
Factors that could lead to an upgrade or downgrade of the ratings
EIA's IFRS is currently rated at the level of the government of Armenia, resulting in limited upward rating potential in the absence of a sovereign ratings upgrade.
Conversely, downward pressure would arise in case of the downgrade of the sovereign rating, lower support assumption, or weaker BCA of the company.
EIAA financial indicators
According to the EIAA financial report as of September 30, 2021, assets amounted to 3.1 billion drams, of which about 68% or 2.1 billion are deposits in banks, 554.1 million - investments in government bonds, 121.6 million - reinsured assets, 49.5 million - expected to be received insurance premiums. The total liabilities of the EIAA as of this date amounted to 593.7 million drams, about 59% of which or 349.4 million are accounted for by obligations under reverse repurchase agreements (we are talking about transactions with government bonds), and over 20% or 120.5 million are accounted for by insurance reserves and equivalent liabilities. As of September 30, 2021, the equity capital of the EIAA is 2.5 billion drams, of which 1.5 billion is the share capital, and 262.4 million is the accumulated profit.
The volume of insurance premiums, according to the financial report of income and expenses of the EIAA for 9 months of 2021, exceeded 247.1 million drams, and premiums transferred by reinsurers - 226.2 million drams, with a 2.3-2.4-fold increase of these indicators year-on-year. The balance sheet profit of the company increased by 16.6% year-on-year, amounting to 167.6 million drams for the first 9 months of 2021, after deduction of tax, net profit formed at the level of 137.2 million drams, having increased by 8.7% per annum. (The settlement rate of the dram against the US dollar was 484.20 drams / $1 as of September 30, 2021).
At present EIAA is the only export insurance company in Armenia. EIAA was established by the government to promote Armenian exports within the framework of the export-oriented industrial policy of the Republic of Armenia.
