RUSSIA: S&P: non-life market remained resilient to the effects of the pandemic and this trend will continue in 2021

12 April 2021 — Marina MAGNAVAL
The Russian non-life insurance market remained resilient to the effects of the COVID-19 pandemic in 2020 and, according to S&P, this trend will continue in 2021 amid an improving macroeconomic environment, the agency said in its review.

The agency positively assesses high standards of underwriting of Russian insurance companies over the past five years, increase in the level of information disclosure by companies, improvement of the regulatory regime, as well as measures to liberalize MTPL tariffs. As a result, S&P revised its Insurance Industry and Country Risk Assessement (IICRA) of the Russian non-life insurance sector and assesses the level of risk as "moderately high" rather than "high".

The agency noted that over the past 5 years, most large non-life insurance companies have accumulated significant capital reserves, demonstrated good operating performance, and improved the average credit quality of investments. S&P noted improved regulatory regime and increased transparency of non-life companies, and the current IICRA assessment of the non-life sector is comparable to the IICRA assessments of similar insurance sectors in countries such as Brazil and South Africa with a comparable level of insurance premiums per capita - less than USD 200 per year.

In 2020, GWP growth of the Russian non-life insurance sector in nominal terms amounted to 3.5%. However, the agency believes that the prospects for this sector's development will be limited in the near future, and the growth rate will be about 5% in nominal terms in 2021-2022, depending on the pace of economic recovery, an increase in disposable income of the population and the industry's adaptation to new post-pandemic environment.

According to the rating agency, the Russian non-life insurance sector received several advantages during the period of restrictive measures in 2020, when a decrease of paid claims in motor insurance and health insurance led to an improvement in the loss ratios of non-life companies, while their losses associated with COVID-19 were minimal. S&P noted that the average loss ratio of non-life companies fell by 1.3% to 47.6% in 2020, and their combined ratio (loss ratio and expenses) was 90%, which is a good indicator, comparable to the five-year average. S&P believes that Russian insurance companies will maintain profitability in insurance activities in 2021-2022, despite increased competition. The combined ratio of the Russian non-life sector is likely to gradually deteriorate to 93-95% in 2021-2022, and the ROE ratio will be worse than in 2020 (in 2020 it was supported by investment income) and will be about 15% in 2021-2022.

The agency positively assesses development of the regulatory regime over the past five years, including a decrease in the number of insurance companies by about 40%, as well as legislative changes and creation of the financial ombudsman institution in 2019, which strengthened control over the motor insurance segment and reduced its exposure to risks associated with legal claims. Motor Hull and MTPL accounted for 46% of the total non-life GWP in 2020 and play an important role for the further growth of the market. Liberalization of MTPL tariffs in 2020 (expansion of the tariff corridor) also supported profitability of insurance companies, while loss ratios in MTPL segment decreased from an average level of 74% over five years to 68% in 2020.

S&P affirmed SOGAZ's ratings at BBB, which reflects its leading position in the Russian non-life market (30% share), good profit margins resulting in strong operating performance, a diversified base of insurance premiums received from corporate and retail clients, and a good risk profile. According to the agency, SOGAZ has demonstrated stability in the current conditions and its GWP growth will continue in 2021-2022 amid economic recovery and growth in business activity. According to the agency's forecasts, net profit of SOGAZ in 2021-2022 will not be lower than the average values for the last three years, and the return on equity (ROE) ratio will be 19-21%, which is higher than the average level expected for the market.

S&P revised its outlook on INGOSSTRAKH BBB ratings from stable to positive as improved operating conditions in the Russian non-life insurance sector have a positive effect on the company's business risk profile. The agency expects that the company's financial strength may improve over the next two years, which will make it possible to upgrade its rating to a level higher than the sovereign ratings of the Russian Federation. The positive outlook reflects S&P's expectation that INGOSSTRAKH "has the potential to significantly improve insurance performance and capitalization and further improve the average credit quality of the investment portfolio in the next two years, as well as maintain a leading position" in the Russian non-life insurance sector.

S&P revised its outlook on RESO-Garantia's BBB credit rating from stable to positive, reflecting the agency's view that the company's creditworthiness is likely to improve over the next two years. The agency expects that RESO-Garantia will be able to demonstrate strong indicators of insurance activity (the combined ratio will be 90-93%), which will continue to be higher than that of most Russian insurance companies. S&P noted the company's significant capital and liquidity reserves, which allow RESO-Garanita to have ratings that exceed the sovereign ratings of the Russian Federation.

S&P revised its outlook on the BB ratings of ROSGOSSTRAKH from stable to positive, considering the agency's opinion "on improvement of the own indicators of the company, which has demonstrated stability in unfavorable macroeconomic conditions". According to the agency, both - improvement of the company's market position and satisfactory operating performance of the Russian non-life sector have a positive impact on the company's business risk profile. The agency expects the company's combined ratio to increase from 98% in 2020 to about 99% in 2021, like for other Russian insurance companies. S&P believes that over the next 12 months ROSGOSSTRAKH will continue to demonstrate satisfactory capital performance through profit retention, supporting business growth in 2021-2023.

The agency's upgrade of the ratings of AlfaStrakhovanie from BB + to BBB- reflects S&P's opinion on stability of the company's indicators in unfavorable macroeconomic situation. Strong positions in the Russian non-life insurance market and strong operating performance have a positive impact on the company's business risk profile. The agency believes that current instability in the financial market did not have a significant negative impact on the business development prospects of AlfaStrakhovanie or its profit indicators due to the relatively low volume of insurance claims caused by the pandemic, as well as the decrease in the number of insurance claims under motor insurance contracts. The agency estimates that the combined net ratio in the Russian non-life sector will be 94-96% in 2021-2022, below the five-year average, and the ROE will be almost 40% in 2020 and 14% in 2021, which is higher than the average expected for insurance market in general. S&P believes that strong operating performance in 2020 allowed the company to increase its capital reserves and "in 2021, AlfaStrakhovanie will continue to improve its capital adequacy ratios to the level corresponding to the rating category BBB, by retaining a major part of its profit and maintaining a moderate dividend payout ratio (less than 6%)".

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