LONDON--(BUSINESS WIRE)--A.M. Best has downgraded the financial strength rating (FSR) to B (Fair) from B+ (Good) and the issuer credit rating (ICR) to “bb+” from “bbb-” of Russian Reinsurance Company JSC (Russian Re) (Russia). The outlook for the FSR has been revised to stable from negative, while the outlook for the ICR remains negative.
The rating actions reflect a material deterioration in Russian Re’s risk-adjusted capitalisation at year-end 2015. The reduction in capital adequacy stems from the weak underwriting performance of the company during the year, primarily a result of a change in reserving practices enforced by regulation, coupled with higher asset risk created from the elevated economic and financial system instability inherent in its domestic market. In 2015, Russian Re reported a RUB 174 million underwriting loss for the year driven by a high frequency of losses, combined with strengthening of reserves for existing and incurred but not reported (IBNR) claims. This translated into a combined ratio above 125% for 2015, making the five-year average combined ratio above 100% for the period between 2011 and 2015. Although the company’s invested assets produced positive investment income in 2015, Russian Re reported a net loss of RUB 39.9 million during the year. A.M. Best believes Russian Re currently maintains a fair level of risk-adjusted surplus, as measured by Best’s Capital Adequacy Ratio (BCAR); however, considers that prospective capital adequacy is expected to be driven by the company’s ability to generate strong earnings in a very challenging market environment.
During the first half of 2016, Russian Re has shown improved underwriting performance and the company is on track to return to operating profitability by year end. Russian Re has taken corrective measures on underperforming business lines and territories, in addition to adopting tighter underwriting guidelines to enhance the selection of risks. However, A.M. Best maintains concerns regarding the sustainability of the company’s medium term performance prospects and its ability to restore its balance sheet strength to a stronger position. This reflects the high asset risk exposure to Russia, uncertainty associated with the rouble and its effect on premium growth and the impact of inflationary pressures on reserve adequacy.
Russian Re’s competitive standing is hindered by its small size (by international standards), with gross written premiums of around RUB 825 million (approximately USD 10 million) in 2015. Russian Re is expected to target growth in selected domestic market segments. In addition, the company plans to expand outside of Russia, mainly in former Soviet Union countries and the Asia Pacific region. A.M. Best believes that Russian Re will likely continue to face significant challenges in growing profitably both in its domestic and foreign markets as a result of increased competition.
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