OREANDA-NEWS. Fitch Ratings has affirmed Garant Versicherungs Aktiengesellschaft Vienna's (Garant) Insurer Financial Strength (IFS) Rating at 'A-'. The Outlook is Stable.

KEY RATING DRIVERS
The rating reflects Fitch's view of the strong probability of support, if needed, for Garant from its parent, the Belgian state-owned credit insurer, Delcredere Ducroire. Fitch considers Garant as strategically 'very important' to Delcredere Ducroire, under its insurance methodology. Combined with what Fitch views as the strong creditworthiness of Delcredere Ducroire, this has led to the rating being notched up by three levels from Garant's standalone credit strength. Garant is a small, niche player in the political risk insurance business and is 95.6%-owned by Delcredere Ducroire.

Fitch views the company's standalone financial position as adequate. However, because of the activities of its policyholders and their close linkage to the global economic environment, claims against it are likely to be somewhat volatile. The agency considers Garant's adequate reserving and its ability to recover a material portion of claims paid over time as offsetting factors. Fitch expects Garant to maintain its disciplined and selective underwriting policy and to focus on profit rather than volumes as highlighted by its limited acceptance rate.

The Stable Outlook reflects Fitch's expectations that Garant will maintain its current solid solvency level and reduce the volatility of its profitability through disciplined and selective underwriting. This is particularly important as demand for credit insurance is likely to remain strong in light of recent political disturbances in several regions and limited financing options.

Garant makes extensive use of reinsurance, which Fitch believes is adequate for the risks the company assumes. Nevertheless, there is concentration risk in the company's core business as Garant specialises in credit insurance and political risk insurance, mostly focusing on emerging markets.

The company's reinsurance programme provides high coverage through quota-share, excess-of-loss reinsurance coverage as well as through a stop-loss cover. Fitch considers the company's reinsurance programme as a major factor supporting its rating and does not expect material changes to the current reinsurance programme.

Garant remains strongly capitalised, as reflected in a regulatory solvency ratio that was 4.5x the required minimum at end-2014.

However, its underwriting performance can be volatile and has deteriorated over the past two years. Despite an improved loss ratio, Garant's net combined ratio increased to 98.4% in 2014, from 97.5% in 2013 (87.3%: 2012), according to Fitch's calculations. This was mainly due to a higher expense ratio and lower reinsurance commission as Garant retains more underwriting risk. In addition, net profit materially decreased to EUR77,000 at end-2014 (end-2013 EUR364,000), following foreign exchange losses. Fitch expects Garant's net profit to slightly improve at end-2015 versus 2014.

The company has a prudent investment strategy. In 2014 the investment result (excluding realised and unrealised gains and losses) was EUR749,000 compared with EUR726,000 in 2013.

RATING SENSITIVITIES
Although unlikely in the short- to medium-term, a change in Fitch's opinion of Garant's strategic importance to Delcredere Ducroire to 'core' from 'very important' could lead to an upgrade as Fitch views the parent's credit quality as higher than that of Garant on a standalone basis.

Key rating triggers that could result in a downgrade include deterioration of Delcredere Ducroire's credit quality and/or an adverse change to Fitch's view of Garant's 'very important' strategic status, deterioration of Garant's standalone credit position through a lower solvency level to below 400% (2014: 453.5%) or a sustained deterioration in the combined ratio to materially above 100%.