Best Assigns ‘B++’ Rating to Sovag

May 9, 2003

A.M. Best Co. announced that it has assigned a financial strength rating of B++ (Very Good) to SCHWARZMEER UND OSTSEE Versicherungs-Aktiengesellschaft SOVAG (Sovag) of Hamburg, Germany with a stable outlook.

Although based in Hamburg, the company’s major shareholder is Ingosstrakh, one of the largest insurers in Russia, which has been Sovag’s major shareholder with a 45% stake for more than 55 years. Best said that it had taken this factor into account in determining the rating. It also indicated that the rating reflects “Sovag’s excellent risk-adjusted capitalisation, very good underwriting performance and very good business position in its niche markets.”

Best noted that a major “offsetting factor is the difficult business and regulatory environment in the countries where Sovag writes risk, which ultimately could negatively affect its market profile.”

The announcement explained that “Sovag’s risk-adjusted capitalisation is excellent based on A.M. Best’s capital model,” and expectations are that Sovag’s capital base will remain sufficient to support its current business plans. “Sovag’s main shareholders have provided funds in the past and A.M. Best believes that they would inject further capital if necessary,” said the announcement.

Best also analyzed Sovag’s combined ratio, noting that “Sovag has consistently produced technical profits and achieved a combined ratio of 94.4% in 2002. Although an improvement from 98.4% in 2001, it is higher than the five-year average of 92.5%. Despite a further decline in investment income due to unrealised losses, pre-tax profits are expected to improve.”

The company is a specialist insurer for risks related to Russia and the countries of the ex-Soviet Union. Best said it has established a very good business position, “initially writing solely marine insurance, Sovag has opportunistically diversified into other classes of business, such as motor liability insurance (in particular short-term Green Card contracts) and niche reinsurance.”

“Ingosstrakh regards Sovag as a vehicle to expand its franchise outside Russia,” said Best. “In accordance with the German insurance supervisory law, Sovag is regulated by the German financial services authorities (BAFIN) and assets are sufficiently protected to meet policyholders’ claims. Sovag has never experienced difficulties in recovering reinsurance receivables from Ingosstrakh, even during monetary restrictions imposed by the Russian government in 1991.”

Best said it expects Sovag to “continue its conservative underwriting strategy in its niche markets. The combined ratio is to remain below 100% in 2003.” And that it will maintain its risk-adjusted capitalization “at an excellent level.”

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