Standard & Poor’s Ratings Services said today it assigned its ‘B’ long-term counterparty credit and insurer financial strength ratings and ‘ruA-‘ Russia national scale rating to Russia-based insurance company Pomosch Insurance Company Ltd. (IC Pomosch). The outlook is stable.
The ratings on IC Pomosch reflect our view of the company’s weak competitive position in international terms, the high industry and country risks in Russia, and the company’s weak capitalization. These factors are offset by IC Pomosch’s marginal operating performance and quality of investments.
IC Pomosch was established in 1995 as a regional insurer based in St. Petersburg, predominantly focused on corporate property insurance and travelers’ medical insurance in the region. In 2007, the company opened a branch in Moscow, which created significant business inflow in 2008, particularly, increasing volumes of obligatory insurance that cover liabilities under state contracts.
We consider IC Pomosch’s overall competitive position to be weak in international terms, as reflected in the company’s relatively small size and generally low brand recognition in the Russian insurance market, except for niche segments where it is well represented. IC Pomosch’s lack of regional presence and recent penetration in new and highly competitive insurance lines are additional constraints. We note that the company’s competitive position also reflects the high industry and country risks in Russia.
In 2010, IC Pomosch was ranked No. 53 among direct insurers in Russia, posting gross premiums written (GPW) of Russian ruble (RUB) 1.6 billion (about $55 million). About 23% of the company’s GPW came from obligatory insurance that covers liabilities under state contracts, and in this segment IC Pomosch had a leading market share of 12%. The Russian insurance regulator imposed obligatory insurance in 2005, but abolished it in August 2010. Owing to this, we believe that IC Pomosch’s competitive position could weaken in 2011. However, we consider that IC Pomosch could partly compensate for the loss in this type of insurance through growth in insurance of construction risks and liability insurance, an area in which it ranks in the top 10, based on GPW.
We assess IC Pomosch’s capitalization as weak and weighed down by weak risk-based capital adequacy, but supported by adequate reinsurance protection. Capital adequacy, according to Standard & Poor’s risk-based insurance capital model, is weak: As of Dec. 31, 2010, available total adjusted capital (RUB571 million) was 65% lower than the level commensurate with the ‘BBB’ rating. However, we note that IC Pomosch has increased its statutory capital to RUB850 million, which exceeds the new regulatory requirements of RUB480 million (effective Jan. 1, 2011) for companies transacting reinsurance business.
The quality of IC Pomosch’s reinsurance program is adequate, in our view. The company places about 79% of its outward reinsurance with companies rated ‘A-‘ or higher, which is on par with large insurance companies in Russia.
We consider IC Pomosch’s operating performance to be marginal, reflected in a very high expense ratio, but very low loss ratios. The net loss ratio was a low 29% in 2010 compared with 17% in 2009. This stemmed mainly from the low loss ratio relating to obligatory insurance that covers liabilities under state contracts, insurance of construction risks, and other liability insurance. However, we note that the company’s net expense ratio is very high compared with that of regional peers. In 2010, the net expense ratio was 75% compared with 82% in 2009. However, IC Pomosch’s net combined ratios increased to 104% in 2010 from 99% in 2009.
We believe that the quality of the company’s investment portfolio is positive for the rating. In 2010, the investment portfolio constituted bonds (60% of the investment portfolio), shares (15%), loans (3%), cash and cash equivalents (20%), promissory notes (1%), and mutual funds (about 1%). In our view, IC Pomosch’s overall credit risk is moderate, reflecting the company’s investments in fixed-income instruments of marginal credit quality. IC Pomosch is exposed to market risk through its investments in equities that are subject to significant market volatility. We note, however, that the company invests in the equities of Russian blue-chip companies and currently aims to decrease its equity exposure to less than 10% of the investment portfolio. Net investment income totaled RUB14.9 million in 2010, up from RUB0.7 million in 2009.
The outlook is stable because we expect IC Pomosch to preserve the marginal quality of its investments, while showing at least marginal operational results in 2011 and beyond. We expect IC Pomosch’s competitive position to be weak overall, although the company could successfully develop in particular niches. We do not expect IC Pomosch’s combined ratio to decrease to less than 90% in 2011-2012, owing to an expense ratio that is higher than peers’.
A significant deterioration of earnings, competitive position, quality of reinsurance protection, or capitalization could lead to negative rating actions.
A positive rating action is unlikely at this stage, but could occur if IC Pomosch further improved its competitive standing, if Standard & Poor’s risk-based capital adequacy ratio for the company increased to at least marginal levels, and if the other credit indicators stayed at their current levels.
Source : S&P Press Release
