AM Best has assigned a Financial Strength Rating of B- (Fair) and a Long-Term Issuer Credit Rating of bb- to Rosgosstrakh Insurance Company, OJSC (Rosgosstrakh) (Russia). The outlook assigned to these Credit Ratings (ratings) is stable.
The ratings reflect Rosgosstrakhs balance sheet strength, which AM Best categorises as adequate, as well as its marginal operating performance, neutral business profile and marginal enterprise risk management (ERM).
Rosgosstrakh is one of the leading insurers in Russia, with a long-standing strong market position in personal lines that benefits from an extensive distribution network and a well-recognised brand. The insurers financial position deteriorated significantly over the period 2015-2017, primarily due to the weak performance of the compulsory motor third-party liability (CMTPL) segment, which accounted for a large proportion of its business. In addition, the company incurred a large investment loss in 2017, stemming from its affiliated holdings. However, in 2017, Rosgosstrakh received a capital injection of over USD 1.6 billion from its parent, Bank Otkritie, following the banks bail-out by the Central Bank of the Russian Federation (CBR). CBR is now Rosgosstrakhs ultimate shareholder and controlling party. A new management team was put in place, which began to implement a turnaround strategy that involved cleaning up the balance sheet and pruning the underwriting portfolio, in preparation for strong growth in 2019 and subsequent years.
Rosgosstrakhs balance sheet strength assessment takes into account its expansion plans for the period 2019-2021. Projected risk-adjusted capitalisation for year-end 2019 is at the strong level, as measured by the Bests Capital Adequacy Ratio (BCAR), and AM Best expects internal capital generation to support planned growth over the forecast period.
The balance sheet strength assessment also reflects the insurers conservative investment portfolio, which has improved significantly over the past two years in terms of credit quality, diversification and exposure to affiliated holdings. As of year-end 2018, Rosgosstrakh had eliminated its breach of regulatory asset diversification prescriptions. However, the credit quality of the investments remains weak by international standards, partly explained by the limited availability of high-quality securities in Russia. The insurers financial flexibility is considered adequate, supported by its association with the CBR.
Rosgosstrakh has a track record of poor technical performance, driven by losses in the CMTPL portfolio and demonstrated by a five-year weighted average combined ratio (2013-2017) of 116%. In 2018, the insurer expects to report a small technical profit, helped by an improvement in the CMTPL loss ratio. Over the medium term, AM Best expects underwriting profitability to improve from pre-2018 levels, although earnings will be constrained by the high level of expenses required to support the expansion strategy. A positive investment return is expected, reflective of the more conservative investment portfolio.
In 2018, the insurer significantly pruned its CMTPL portfolio, reducing its market share in the segment to approximately 10% (2016: 24%, 2015: 35%). Consequently, overall gross written premium for the year is expected to have fallen to approximately RUB 69 billion from RUB 85 billion in 2017. After contracting for three consecutive years, the insurer now plans material growth over the period 2019-2021, targeting a 14% non-life market share in 2021 (2018 estimated market share of 8%). In addition, there are plans to grow significantly in the life market, on the base of a newly acquired mid-tier life insurer.
Rosgosstrakhs ERM is currently evolving, with new organisational structures and frameworks being developed in order to improve governance and risk culture.
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