AM Best Affirms Credit Ratings of Rosgosstrakh Insurance Company, OJSC

LONDON--(BUSINESS WIRE)--AM Best has affirmed the Financial Strength Rating of B- (Fair) and the Long-Term Issuer Credit Rating of “bb-” of Rosgosstrakh Insurance Company, OJSC (RGS) (Russia). The outlook of these Credit Ratings (ratings) is stable.

The ratings reflect RGS’ 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).

RGS’ risk-adjusted capitalisation was at the strongest level in 2019, as measured by the Best’s Capital Adequacy Ratio (BCAR). The BCAR scores were stronger than previously anticipated by AM Best due to lower than expected capital requirements, as RGS did not achieve planned premium growth. AM Best expects prospective RGS’ risk-adjusted capitalisation to be supported by positive operating results and the absence of a requirement to pay dividends over the next three years. The balance sheet strength assessment also reflects the insurer’s conservative investment portfolio, which has improved significantly over the past two years in terms of credit quality, diversification and exposure to affiliated holdings. Whilst RGS’ balance sheet is exposed to the high financial system risk in Russia, which has intensified in the first quarter of 2020 due to the impact of declining oil prices and economic consequences of the COVID-19 pandemic, AM Best considers the insurer’s risk-adjusted capitalisation to have a sufficient buffer to absorb any near-term volatility. The company’s financial flexibility is adequate, supported by its association with The Central Bank of the Russian Federation (CBR).

RGS has a track record of poor technical performance, driven by losses in the compulsory motor third-party liability (CMTPL) portfolio and demonstrated by a five-year (2015-2019) weighted average combined ratio of 116.8%. In addition, a large non-operating loss was incurred in 2017, largely due to impairments of affiliated investments. In 2018 and 2019, underwriting performance improved, with combined ratios of 94.7% and 98%, respectively, helped by remediation of the CMTPL portfolio initiated by the new management team. Over the medium term, AM Best expects the combined ratio to remain below 100%, although there is potential for the motor loss ratio to be affected negatively by the recent depreciation of the Russian rouble. Prospective investment performance is expected to be positive, but subject to potential volatility.

RGS is one of the leading insurers in Russia, with a strong market position in personal lines that benefits from an extensive distribution network and a well-recognised brand. In 2017, RGS received a capital injection of USD 2 billion from the CBR, which became its ultimate shareholder and controlling party. In 2018, the insurer significantly pruned its CMTPL portfolio, reducing its market share in this segment. The company plans to grow strongly in corporate and personal lines, and there are plans to grow significantly in the life market (15% of gross written premium in 2019). In AM Best’s opinion, implementation is subject to execution risk, especially in the view of competitive conditions in its domestic insurance market and the expected decline in the country’s economic growth in 2020, which is likely to impact insurance demand.

AM Best considers RGS’ ERM as marginal, with new organisational structures and frameworks being developed in order to improve governance and risk culture.

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