TEXT-S&P rates Rosgosstrakh 'BB-/ruAA-'; outlook stable

Fri Dec 28, 2012 5:47am EST

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Rationale

The ratings reflect Standard & Poor's Ratings Services' view of Rosgosstrakh's strong competitive position and adequate operating performance, which is on a positive trend.

The ratings are constrained by the company's weak capitalization and investments, weak financial flexibility, and the high industry risks it faces in the insurance market in Russia (Russia; foreign currency BBB/Stable/A-2; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA').

Our overall view of Rosgosstrakh's capitalization is constrained by what we regard as its weak capital adequacy, in part due to the weak quality and large concentrations of its invested assets.

We believe that OAO Rosgosstrakh has significant internal capital generation capacity, which, in the absence of expected dividend payments, will allow it to generate significant capital over the next two years while it derisks certain assets.

The quality of OAO Rosgosstrakh's investment portfolio is weak. Significant risks arise from single-name and related-party concentrations and investments in real estate. It is supported by the marginal overall quality of the fixed-income portfolio, however.

From total invested assets of Russian ruble (RUB) 78 billion ($2.6 billion), about 60% are invested in fixed-income instruments: bonds, bank deposits, bank current accounts, and promissory notes. We see this portfolio's overall credit quality as marginal.

Investments in deposits and current accounts are characterized by very high single-name concentration on affiliated OJSC Rosgosstrakh Bank (not rated). In 2011, concentration on this bank was 1.4x times reported capital. We understand that OAO Rosgosstrakh is aware of this high level of concentration and is moving to reduce it. We expect it to decrease by at least 50% as of year-end 2012.

Almost 20% of the investment portfolio is in real estate. We regard such a concentration in real estate as high risk, because it exposes the company to swings in real estate prices.

We view OAO Rosgosstrakh's financial flexibility as weak. This view reflects what we consider to be its high debt leverage with limited capacity to issue additional debt.

We understand that OAO Rosgosstrakh has set itself the goal of decreasing its leverage to about RUB12 billion by year-end 2012, which approximately translates to a financial leverage ratio (debt to reported capital) of 50%. However, we still view this level as very high. We expect a limited reduction of the debt burden in 2013.

OAO Rosgosstrakh the largest non-life insurer in Russia in terms of gross premium written--RUB103 billion ($3.4 billion) in 2011. OAO Rosgosstrakh is ultimately controlled by Danil Khachaturov, who acts as the company's CEO.

We view OAO Rosgosstrakh's competitive position as strong. With strong positions in motor risks, the company enjoys strong brand recognition, and a superior distribution network. However, we believe that the high level of industry and country risks somewhat constrains its competitive advantages.

We view OAO Rosgosstrakh's 2011 operating performance as adequate. The company managed to achieve positive bottom-line results in 2011, after several years of losses. We believe that OAO Rosgosstrakh is well positioned to maintain positive bottom-line results in the future. The net combined ratio in 2011 significantly improved to 98.2% (113% in 2010), mostly driven by improvements in the net loss ratio. We think that the 2012 combined ratio could moderately improve, driven by profitable motor third-party liability business, while 2013 results should remain stable. Investment returns bring little volatility, reflecting the fixed-income nature of the company's investment portfolio.

The rating on OOO Rosgosstrakh is at the same level as the rating on OAO Rosgosstrakh because OOO Rosgosstrakh is 99.9% owned by OAO Rosgosstrakh and is a core subsidiary of OAO Rosgosstrakh. OOO Rosgosstrakh is the largest operating company within the OAO Rosgosstrakh group, it constitutes about 98% of consolidated assets, nearly 90% of consolidated shareholders' equity, and 98% of the group's premium.

Outlook

The stable outlook incorporates our view that OAO Rosgosstrakh will sustain the improvement in its operating performance and continue to generate stable investment returns. We also expect a reduction in single-name concentrations in the investment portfolio to contribute to an improvement in capital adequacy.

We would consider a negative rating action if Rosgosstrakh's operating performance significantly deteriorated, leading to bottom-line losses and pressuring capitalization. We could consider a downgrade if OAO Rosgosstrakh's high financial leverage put pressure on liquidity.

We would consider a positive rating action if the company were to significantly improve its capital base, at least to a marginal level, as well as reducing its risk concentrations and financial leverage.

Related Criteria And Research

-- Management And Governance Credit Factors, Nov. 13, 2012

-- Principles Of Credit Ratings, Feb. 16, 2011

-- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

-- Use Of CreditWatch And Outlooks, Sept. 14, 2009

-- Holding Company Analysis, June 11, 2009

-- Interactive Ratings Methodology, April 22, 2009

-- Group Methodology, April 22, 2009

-- Counterparty Credit Ratings And The Credit Framework, April 14, 2004

Ratings List

New Rating

OAO Rosgosstrakh

Counterparty Credit Rating

Local currency BB-/Stable/--

Insurer Financial Strength Rating

Local currency BB-/Stable/--

Russian National Scale Rating ruAA-

OOO Rosgosstrakh

Counterparty Credit Rating

Local currency BB-/Stable/--

Insurer Financial Strength Rating

Local currency BB-/Stable/--

Russian National Scale Rating ruAA-

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