Best Affirms Russian Re’s ‘B+’ Ratings; Outlook Stable

December 14, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Russian Reinsurance Company JSC (Russian Re), both with stable outlooks.

The ratings of Russian Re “continue to reflect its excellent risk-adjusted capitalization and good operating performance, albeit largely driven by investment returns,” Best explained. As partial offsetting factors Best cited “Russian Re’s small size in a competitive market environment,” as well as its “exposure to the high political and financial system risks associated with its core markets.”

Best also said it “believes that Russian Re’s risk-adjusted capitalization is excellent, supported by the retention of earnings and low investment risks. Following the Russian Federation’s new legislative requirements, Russian Re increased its share capital from RUB 120 million [$3.9 million] to RUB 480 million [$15.6 million] in the first quarter of 2011.

“Planned premium growth will cause a slight deterioration in risk-adjusted capitalization, but capital levels will remain strong and supportive of the current ratings. The company benefits from the ongoing support from its high profile shareholders who support Russian Re with its international expansion plans.

The ratings report also noted that “pre-tax profits decreased to RUB 12.6 million [$409,498] (2010: RUB 43 million [$1.4 million]) following a significant increase in incurred claims due to higher loss experience and an increase in claims provisions. This translated into a loss ratio of 54.9 percent (2010: 36.5 percent). In the absence of large losses in the third quarter of 2012 and supported by a higher premium base,” Best said it ” believes that Russian Re could achieve a combined ratio in the 85 percent-90 percent range.”

In addition Best pointed out that Russian Re “remains very conservatively invested with the majority of its assets being held in cash and short-term bank deposits (55 percent) and property (40 percent), providing it with a stable interest and rental income.

“The company’s own property and the property held for investment purposes are located in the center of Moscow. A booming property market has led to an important appreciation of Russian Re’s property values, which is not reflected within the income statement under Russian GAAP. Under International Financial Reporting Standards, the gain on revaluation of investment property would equate to approximately RUB 50 million [$1.625 million].

“Russian Re’s gross written premiums are expected to reach RUB 580-600 million [$18.85 to $19.5 million] by year-end 2012 as the reinsurer continues to focus predominantly on property and energy risks.

“The overall business volume remains relatively small by international standards, and Russian Re will continue to face significant challenges in growing its domestic market presence as a result of competition from both local and international reinsurers.

“Management’s current strategy is to expand outside of Russia and the Commonwealth of Independent States, with the Middle East and North African markets remaining the key drivers for growth.

“Positive rating actions could occur if Russian Re profitably grows its business whilst maintaining risk-adjusted capitalization at a strong level over the longer term.

Negative rating actions could occur if there is material deterioration in the company’s operating performance, particularly due to unprofitable growth in non-core markets, or a significant decrease in risk-adjusted capitalization due to its expansion. Additionally, deterioration in country risk factors associated with Russian Re’s operations in Russia could negatively impact its ratings.”

Source: A.M. Best

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