FITCH affirms SOGAZ'S IFS at 'BB+'; outlook stable

18 November 2011 — Vlad BOLDIJAR
FITCH affirms SOGAZ'S IFS at 'BB+'; outlook stable
sogazFITCH Ratings has affirmed Insurance Company of Gas Industry SOGAZ (Russia)'s (SOGAZ) Insurer Financial Strength (IFS) rating at 'BB+' and National IFS rating at 'AA(rus)'. The Outlooks are Stable.

This statement was released by the rating agency.

The affirmation reflects SOGAZ's risk-adjusted capital position's resilience to reduced profitability in 2010 despite the continued dynamic growth of business volumes and the insurer's reliance on internal capital generation. The ratings continue to take into account SOGAZ's solid market position and its long track record of sustainable earnings generation.

FITCH also continues to recognize SOGAZ's 51% majority (indirect) shareholder, Bank Rossiya's weak credit quality, SOGAZ's significant exposure to affiliated investments and it's continued, although decreasing, reliance on business derived from Gazprom.

SOGAZ reported a record high loss ratio of 76.7% in 2010 (average 65.1% in 2005-2009). It was influenced by a wide range of factors, including increased attritional loss levels, adverse prior year reserve development and natural catastrophic losses in H210. FITCH notes that the insurer improved its interim loss ratio to 59.1% in H111 (H110: 68.4%), but this improvement was, to some extent, supported by reserve releases related to catastrophic losses.

Although FITCH recognizes the short-term or one-time only nature of some of SOGAZ's recent high claims experience, the agency is concerned that some of the recent developments may potentially be of a longer term nature and may in the medium term, therefore, continue to put pressure on SOGAZ's underwriting performance, which has traditionally been the key source for capital strengthening. In particular, these trends include heightened attritional claims activity with a concentration in SOGAZ's most profitable line - commercial property - the recently reduced accuracy of reserving, partially explained by the changed levels of attritional losses, and some liberalisation of cost management, manifested in 2011. Partially offsetting these concerns is the overall adequacy of SOGAZ's reserves, certified by a reputable international auditing firm.

FITCH continues to recognize SOGAZ's underwriting expertise in the core commercial insurance segment as a positive rating factor and believes that SOGAZ retains its ability to earn profit through the underwriting activity at least while the insurer holds its current market position. The agency also understands that the insurer plans to adjust tariffs in response to the causes of its weaker profitability in 2010. At present, the timing and effectiveness of this response are, however, difficult to assess until the full impact of premium rate adjustments are reflected in published underwriting results.

FITCH expects that the introduction of a new compulsory line - insurance of liability of operators of hazardous facilities - from 2012 will have positive impact on the insurer's underwriting performance. This expectation is supported by a relatively strong level of tariffs set by the government, considerable segment size and the high probability of SOGAZ becoming one of the leading players in this segment.

The insurer's risk-adjusted capital position demonstrated resilience to the reduced underwriting profit in 2010 despite the increased pressure of business volumes, when net premiums grew by 22%. Based on the agency's internal assessment, FITCH continues to consider SOGAZ's capital strength to be more than commensurate for its rating level. FITCH notes that the restoration of the underwriting profitability would be crucial for SOGAZ to maintain its capital adequacy in the context of the anticipated further dynamic growth.

While SOGAZ's investment portfolio contains a large proportion of marketable fixed-income instruments (end-H111: 80%; end-2010: 78%), which FITCH views positively, it also contains a number of weaknesses, which could put pressure on the insurer's capital. Of these weaknesses FITCH identifies a direct exposure to Bank Rossiya, which represents a material portion of the insurer's equity, as the most significant, although this exposure has declined moderately. In addition, SOGAZ has made several equity investments in conjunction with the bank. At the same time FITCH notes that SOGAZ has a relatively strong liquidity position.

The affiliated investment leverage, calculated as total affiliated investments to adjusted equity, remained at a high level at end-2010, although this was a reduction from end-2009's level. In its calculation FITCH includes both leverage associated with Bank Rossiya group and Gazprom group, including GazpromBank.

FITCH considers that a notable reduction in SOGAZ's concentrated exposure to counterparties and in its affiliated investment leverage could lead to an upgrade. Conversely, an increase in affiliated investments might lead to a downgrade.

FITCH would view positively further growth in the core commercial non-life insurance segment through the diversification of the franchise base, provided SOGAZ manages to return to strong underwriting results and generate sufficient capital to support this growth.

With gross assets of RUB82bn at year-end 2010 and gross premiums written of RUB51bn, SOGAZ is one of the three largest Russian insurers.

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