Best Affirms SCHWARZMEER UND OSTSEE (SOVAG) Ratings; Outlook Stable

July 16, 2012

A.M. Best Europe Rating Services Limited has affirmed the financial strength rating (FSR) of ‘B++’ (Good) and the issuer credit rating (ICR) of “bbb” of SCHWARZMEER UND OSTSEE Versicherungs-Aktiengesellschaft SOVAG, which is based in Germany, both with stable outlooks..

SOVAG’s ratings reflect its “strong risk-adjusted capitalization, improving operating performance and good business profile as a specialist insurer of Russian risks within Europe,” Best explained. “SOVAG’s risk-adjusted capitalization remained strong in 2011 and is expected to remain at a similar level for the coming year, supported by full retention of earnings. The company’s capitalization continues to be enhanced by an equalization reserve, which at the end of 2011 amounted to €36.5 million [$44.64 million].”

Best noted that in 2011, SOVAG reported a small underwriting loss of €900,000 [$1.1 million], compared to a positive figure of €13.3 million [$16.266 million] in 2010. The improvement in SOVAG’s technical performance was “supported by a substantial prior year reserve release, as well as a better performance from the motor portfolio. The company intends to introduce a new pricing structure for its motor portfolio towards the end of 2012 (which represented 38 percent of net written premium (NWP) at year-end 2011) and is currently reviewing loss making contracts.”

Best said these changes “should lead to a gradual and sustained improvement in SOVAG’s underwriting results. Given the company’s large reserve release in 2011, it is unlikely that SOVAG’s technical performance in 2012 will exceed the level of the previous year.”

The report explained that “SOVAG maintains a niche position as a specialist insurer of risks emanating from Russia and the Confederation of Independent States, as well as a leading provider of insurance coverage for Russian immigrants in Germany.

“In January 2012, SOGAZ Insurance Company OJSC (SOGAZ) (Russia) increased its shareholding in SOVAG to 50.9 percent from 45.9 percent to become the majority shareholder. To date, SOVAG has mainly marketed its personal lines portfolio to Russian immigrants.

“However, the company is now actively targeting non–immigrant Germans with its personal lines products via small regional brokers. In 2012, with the implementation of the new motor pricing structure and an increase in business written for Russian companies with European interests facilitated by SOGAZ, NWP is likely to increase from €63.0 million [$77 million], which was reported in the previous year.

“Upward rating movement in SOVAG’s ratings could occur if there were marked and sustained improvements in the company’s underwriting performance, as well as its business profile. However, this would be subject to the potential impact from SOGAZ’s ratings.

“Downward rating movement in SOVAG’s ratings may be triggered if there were a deterioration in technical and/or overall results and a material decrease in risk-adjusted capitalization. Additionally, negative rating actions could occur if there were a deterioration in the FSR of ‘B++’ (Good) and ICR of “bbb” (with a stable outlook) of SOGAZ.”

Source: A.M. Best Europe

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