ACRA Trainings on Credit Analysis

ACRA assigns ВВ-(RU) to Insurance Company “ARSENAL” LLC, outlook Stable

The credit rating assigned to Insurance Company “ARSENAL” LLC (hereinafter, ARSENAL or the Company) is based on the assessment of its management quality derived from the negative assessment of risk management and neutral assessments of other management quality components, amid average business profile assessment and below-average financial profile assessment. The rating is supported by a competitive advantage of the Company in the third-party liability insurance in customs clearance.

Positive rating factors include comfortable forecasted operating efficiency and strong liquidity of the Company. The rating is restrained by the risk management system established in the Company.

Key rating assessment factors

Over the past few years, ARSENAL has been a leading insurance company in terms of third-party liability insurance in customs clearance (about 50% of the Company's insurance premiums). In 3Q2016, the Company concluded a compulsory state personal insurance contract (CSPI contract) with the Ministry of Internal Affairs of the Russian Federation (insurance premium of RUB 7.5 billion), following which the Company’s insurance premiums increased by more than four times in 2016 compared to 2015. The negative result from insurance activities under this contract, which ended on December 31, 2016, will be a decisive factor for the Company’s financial performance in 2017. In the business profile assessment, ACRA did not take into account the effects of the above CSPI contract due to its cancellation and considered the contract as exceptional. However, the contract was taken into account in determining the financial profile and quality of management of the Company. As of September 30, 2017, the Company operated in 26 regions of the Russian Federation.

Average business profile of the Company is determined by its limited market positions and average operating indicators. According to data for 9M2017, the ARSENAL’s market share was less than 1%. Taking into account high shares of the largest customers and narrow geographic coverage of the insurance portfolio, the diversification of the ARSENAL’s customer base is estimated at below-average. The Agency is of the opinion that the quality of the ARSENAL’s product line is weak, which follows from the assessment of the completeness and relevance of the insurance products offered by the Company. ACRA assesses the sales channels diversification as average.

The average assessment of operating indicators is based on the forecast for the ARSENAL’s business. The combined loss ratio (excluding the CSPI contract) was 0.57 at the end-2016. It is expected that the ratio will be in the range from 0.99 to 0.81 in the future. Since 2016, there has been a decrease in the volume of the Company’s signed insurance premium (excluding the CSPI contract). ACRA expects that in 2017–2018, the growth rate of the Company’s insurance premium will be lower than the market average.

Below-average financial profile. As calculated according to the ACRA methodology as of September 30, 2017, the available capital to risk capital ratio was 0.55, which, combined with the average assessment of the absolute capital and the limited assessment of access to capital sources, resulted in the capital adequacy assessment as below-average. In determining the available capital ratio, adjustments were made to include changes in the valuation of assets and liabilities made by ACRA.

The assets quality is limited by a “moderate” risk assessment in terms of regulatory compliance. ACRA notes that, in the periods from February 15, 2017 to April 04, 2017 and from April 28, 2017 to August 09, 2017, certain violations took place concerning the ratio of the total assets in which own funds (capital) were invested to the total own funds (capital) of the Company, and from Match 16, 2017 to March 31, 2017 and from June 30, 2017 to July 28, 2017, certain violations took place concerning the ratio of the total assets in which insurance reserves are invested to the total insurance reserves of the Company. ARSENAL invests mainly in assets with a low risk index and also maintains a high enough ratio of capital to assets (0.58). At the same time, the Company is characterized by an increased concentration of assets: as of September 30, 2017, the top 10 investments accounted for 74% of assets.

Strong liquidity position is determined by the current and long-term liquidity ratios of 1.39 and 1.62, respectively.

Management quality assessment is a result of the negative assessment of the “risk management” sub-factor and neutral assessment of other management quality components, which, according to the ACRA methodology, limits the Company’s standalone creditworthiness assessment (SCA) at “b+.” Negative assessment of the “risk management” sub-factor is caused by the risk management system in the Company, in particular, business decisions to conclude the CSPI contract in isolation from the risks of regulatory compliance of the Company’s assets.

In view of the Company’s competitive advantage in the third-party liability insurance in customs clearance, ACRA applied an individual positive adjustment of one notch up to the SCA.

Key assumptions

  • The Company to successfully implement its business plans in the nearest 12–18 months
  • The combined loss ratio below 0.99
  • The Company to retain key positions in third-party liability insurance of cargo carriers undergoing customs clearance

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • A better risk management system.

A negative rating action may be prompted by:

  • The operating ratio growing above 0.99;
  • A loss of key positions in the third-party liability insurance in customs clearance.

Rating components

SCA: b+.

Adjustments: +1 notch to SCA. 

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Insurance Companies Under the National Scale for the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating has been assigned to Insurance Company “ARSENAL” LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 04, 2017).

The credit rating is assigned based on the data provided by Insurance Company “ARSENAL” LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the RAS and IFRS financial statements of Insurance Company “ARSENAL” LLC. The credit rating is solicited, and Insurance Company “ARSENAL” LLC participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by Insurance Company “ARSENAL” LLC in its financial statements have been discovered.

ACRA provided additional services to Insurance Company “ARSENAL” LLC.

No conflicts of interest were discovered in the course of credit rating assignment.

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