Russian insurers downgraded on severely adverse macroeconomic climate

8 March 2022 — Daniela GHETU
S&P Global Ratings said on 7 March 2022 that it has taken negative rating actions on its rated Russian insurers, reflecting the agency's view of the heightened likelihood of financial and business vulnerability caused by rapidly escalating geopolitical and economic risks in Russia and follow the lowering of the Russian sovereign rating to CCC-.

The rating actions include the following:

  • S&P has lowered to 'CCC+' and placed on CreditWatch developing the ratings on Alfastrakhovanie OAO, Energogarant PJSIC, Ingosstrakh Insurance Co., Lexgarant Insurance Co. Ltd., Insurance Co. RESO-GARANTIA and its non-operating holding company Stanpeak Ltd., Sogaz Insurance, and VSK Insurance JSC. This reflects the combination of the lowering of the sovereign credit rating on Russia, the negative CreditWatch placement on Russia, and the ability of the insurers to withstand a short-term stress.
  • S&P has also lowered the ratings on Sberbank Insurance LLC to 'CCC-', placed the ratings on CreditWatch negative, and then withdrew them at the issuer's request. The downgrade and CreditWatch negative placement reflect the combination of the lowering of the sovereign credit rating on Russia, the negative CreditWatch placement on Russia, and the pressure on Sberbank group's creditworthiness.
Here is the argumentation presented by the rating agency in its press release:

"Russia's military conflict with Ukraine has prompted a new round of G7 government sanctions that we believe will likely substantially increase the risk of sovereign default. The sanctions also imposed restrictions that deny or significantly diminish the access of the Russian banking system to the global financial system, markets, and infrastructure. We believe these risks could permeate into the Russian insurance and reinsurance sector and potentially pose challenges related to insurers' ability to access global markets or to meet financial commitments.

Russian insurers are facing escalating uncertainty regarding potential operational or financial restrictions and access to liquidity, making them vulnerable to deterioration in economic or geopolitical conditions. We consider the impact of recent sanctions and possible additional ones could further intensify volatility in domestic markets and the local currency, or limit access to international markets and currencies, which in turn could erode the profitability, liquidity, and capital positions of domestic insurers.

That said, we believe that the insurers will likely be able to meet their financial commitments over the near term, thanks to low leverage on balance sheets, their current ability to transact with international markets, and potential domestic reinsurance backstop facilities. We also note some favorable factors such as geographical diversity of operations, deposits in foreign banks that can be used to pay foreign obligations, and insurers' ability to access domestic assets to pay for local obligations.

Lexgarant, in particular, benefits from its focus on international business and its foreign currency deposits outside Russia. We however believe the risks for Lexgarant relate more to potentially progressing sanctions, which may prohibit it from accessing the international insurance market considering its concentration on international aviation business.

For these reasons, the ratings on all the above-mentioned insurers (with the exception of Sberbank Insurance) are above the Russian sovereign ratings. Considering Sberbank group's wider integration with the domestic economy, we believe its creditworthiness is more influenced by sovereign-related risks compared to the other insurers. As a result, we have lowered the ratings on Sberbank Insurance to the same level as the sovereign ratings and we are withdrawing the ratings at the issuer's request."