Rating agency names reason behind decline in AzRe's consolidated revenue in 2021

AM Best has revised the outlooks to stable from positive and affirmed the Financial Strength Rating of B+ (Good) and the Long-Term Issuer Credit Rating of "bbb-" (Good) of AzRe Reinsurance, OJSC (AzRe) (Azerbaijan).

Report informs, citing the agency, that these Credit Ratings (ratings) reflect AzRe’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, limited business profile and marginal enterprise risk management.

The revision of the outlooks to stable from positive reflects increased uncertainty that the rating fundamentals will support a higher rating level in the near term following a reduction in the size of AzRe’s capital base in 2020 and recent changes in the company’s (re)insurance portfolio composition.

"AzRe’s balance sheet strength is underpinned by consolidated risk-adjusted capitalisation that is expected to be maintained at the strongest level, as measured by Best’s Capital Adequacy Ratio (BCAR), as well as good quality retrocession and a conservative investment portfolio by asset type. Offsetting factors include the vulnerable credit quality of the company’s bond portfolio and exposure to the high financial system risk in Azerbaijan. Although AzRe does not have a formal dividend policy, AM Best expects future earnings retention to support internal capital growth, which will allow the company to maintain its strongest level of risk-adjusted capitalisation," the agency said.

They added that AzRe has achieved strong operating results in recent years, as demonstrated by a five-year (2016–2020) weighted average return-on-equity of 21.1%. Total earnings are supported by strong investment returns reflective of Azerbaijan’s high interest rate environment.

"Although AzRe’s technical profitability deteriorated in 2020 due to the material net losses incurred in its personal accident account, the underwriting result remained positive. The company benefits from relatively low loss ratios in Azerbaijan, which have supported a five-year (2016-2020) average non-life combined ratio of 63.8%. However, prospective technical performance is subject to potential volatility due to exposure to large losses and the evolving operating environment in Azerbaijan," the analysts say.

AzRe is one of the leading players in the local (re)insurance market where it benefits from its profile as Azerbaijan’s only specialised reinsurer. In 2021, the company’s consolidated premium income was negatively affected by the non-renewal of a significant personal accident account and the removal of a non-life (direct) insurance subsidiary from the group.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.