YEREVAN, April 17. /ARKA/.  Moody's Investors Service (Moody's) affirmed last week the Ba3 foreign and local-currency insurance financial strength ratings (IFSRs) and b1 Baseline Credit Assessment (BCA) of Export Insurance Agency of Armenia ICJSC (EIAA). The outlook remains negative.

The rating action reflects the company's change in business and financial profiles following the large loss reported in 2022 in relation to its exposure in Russia, the reversal of this loss in the first quarter of 2023, the loss of its 90% quota-share protection on its Russian exposure and the significant reduction of its exposure to Russia.

In 2022, EIAA reported a loss of AMD42.6 million due to a late payment from a Russian buyer to the insurers' main policyholder. The claim was largely ceded to reinsurers, as EIAA benefitted from a 90% quota-share treaty. As a result, the company's shareholders' equity declined to AMD 2.35 billion at YE2022 from AMD2.46 billion at YE 2021

Nonetheless, the affirmation of EIAA's b1 BCA reflects the insurer's continued strong capital adequacy relative to its net total exposures. While reinsurers decided not to renew the reinsurance of EIAA's Russian exposure, the company rapidly decreased this exposure and all exposures outside of Russia and Belarus remains reinsured by Swiss Reinsurance Company Ltd (Aa3 IFSR stable). As a result, EIAA's shareholders' equity as a proportion of total assets (equity-to-assets ratio) remains high at around 50% at the end of 2022, and the ratio of net exposure as a percentage of shareholders' equity remains very strong The affirmation also reflects EIAA's low financial leverage and high exposure to Armenian government bonds (Ba3) and deposits with Armenia-based banks which accounted for around 100% of EIAA's shareholders equity at the end 2022.

The affirmation of Ba3 IFSR reflects moderate probability of support from the Government of Armenia (Ba3 negative), resulting in a one-notch uplift from b1 BCA. EIAA is currently the only export insurance company in Armenia, established by the government to promote Armenian export within the framework of the export-oriented industrial policy of the republic of Armenia. Moody's thus maintains a moderate probability of government support which takes into account the current full ownership of EIAA by the Armenian Government as well as the lack of any implicit or explicit Government guarantees.

The negative outlook reflects Moody's expectation that EIAA's profitability will deteriorate in the next 12-18 months due to material weakening of EIAA's business franchise as a result of substantial contraction of its business volumes following its decision to reduce its exposure to Russia. Under local GAAP, EIAA's GWPs decreased by 23% in 2022. The negative outlook also reflects Moody's concerns about EIAA's ability to restore its business volumes.

In addition, given that Russia remains the largest export market for Armenia, EIAA is considering gradually resuming coverage of exports to Russia and looking for reinsurance options available on its local and regional markets to cover this specific exposure. This would imply that the company will use weaker reinsurance protection, which would deteriorate its risk profile if exposure to Russia became material.

Finally, the negative outlook also mirrors the negative outlook on the Government of Armenia Ba3 rating and reflects EIAA's government ownership and dependence on the Armenian exporters for its revenues and operating profits and investment portfolio concentration in Armenian government bonds and deposits with Armenian banks.

EIAA's IFRS is currently aligned with the rating on the government of Armenia, which limits upward potential, particularly given the negative outlook on the sovereign. The outlook on the EIAA's IFSR could be changed to stable from negative if the outlook on the sovereign rating is changed to stable along with stabilization of the company's credit profile. -0-