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Various Rating Actions Taken On Russian Insurers As A Result Of Rising Economic Risk

March 10, 2015 | Standard & Poor's

MOSCOW (Standard & Poor's) March 6, 2015--Standard & Poor's Ratings Services
said today it has revised its assessment of Russian property and casualty
(P&C) insurance industry and country risk (IICRA) to high from moderate and
consequently took negative rating actions on four Russia-based insurance
companies (see "Ratings List" below).

The rating actions reflect many of the same credit factors that led us to
lower the sovereign ratings on the Russian Federation and to revise our
Banking Industry Country Risk Assessment (BICRA) for Russia to Group 8 from
Group 7 (see "Various Rating Actions Taken On Russian Banks Due To Rising
Economic Risk," published Feb. 24, 2015, on RatingsDirect).

Today's actions reflect our view that economic prospects in Russia are likely
to remain significantly weaker over the next couple of years than we had
previously anticipated. We now consider that the impact of the ongoing
deterioration of the economic environment will be more severe than we
anticipated before.

We expect that oil prices, the impact of the sanctions, and growing business
uncertainty will lead to an economic contraction in 2015 of 2.6%, with average
growth in 2015-2018 of about 0.5%--significantly weaker than the 2.4% average
over the previous four years.

Historically, Russia's insurance market has been volatile and very dependent
on economic factors. Consequently, we expect insurance sector growth to
decelerate in 2015 to less than 2% in nominal terms, as measured by gross
premiums written (GPW). We now believe that growth in real terms will likely
be negative, considering projected inflation of 13.5%. We see accelerating
inflation adding to growing losses in the insurance sector. We believe,
however, that in 2016 and 2017 growth will pick up and with the expected
deceleration in inflation, it will be positive in real terms.

We expect car sales in Russia to continue to fall, putting significant
pressure on demand for motor insurance, which represents about 20% of total
market GPW.

We see some support of premium levels in obligatory insurance lines, which
have limited demand elasticity and account for about 17% of GPW in Russia. We
also saw an increase in the obligatory third-party liability insurance base
tariff set by the government in late 2014, and we expect a further increase in
2015.

We believe that the recent Russian ruble weakening against the dollar, the
euro, and the yen will be painful for insurers, especially for companies
engaged in motor insurance. We believe the rising cost of imported spare parts
will put loss ratios in motor insurance under significant pressure.

Our view on the overall assessment of the industry risks that Russian insurers
face remains unchanged, but we note a clear negative trend in expected return
on equity (ROE) for the sector. Nevertheless, we believe that the sector will,
in aggregate, be profitable. We believe that ROE in 2015 will be supported by
investment income, which will be higher than in 2014, reflecting an interest
rate hike on deposits, which are the main investment asset for insurers. If we
believe that ROE for the sector is under 4% for a prolonged period of time we
could negatively revise our assessment of the sector's profitability and
consequently revise our assessment of industry risk for the Russian P/C
insurance sector to moderate from intermediate. However, this wouldn't have an
immediate impact on our final IICRA.

We note that average credit quality of insurers' assets is deteriorating as
most of invested assets are Russian bank deposits and investments in Russian
government and corporate bonds. We believe that the average credit quality of
insurers gravitates toward 'BB', whereas previously it was closer to 'BB+'.

As a result of our IICRA revision, and also taking into account the latest
company-specific developments, we are taking rating actions on several
insurers, as detailed below.

SOGAZ AND CJSC INSURANCE CO. TRANSNEFT
We have lowered our long-term counterparty credit ratings on Sogaz and
Insurance Co. Transneft to 'BB+' from 'BBB-' and our Russia national scale
ratings to 'ruAA+' from 'ruAAA'. The outlook is stable. We have removed all
ratings from CreditWatch negative where we placed them on Dec. 29, 2014.

We equalize the rating on IC Transneft with that on Sogaz due to its core
status to the company. The downgrade reflects our revision of the business
risk profile to fair from satisfactory, driven by our change in our assessment
of the insurance industry and country risks. The ratings continue to reflect a
less than adequate financial risk profile supported by moderately strong
capital and earnings, and capped by the weighted average credit quality of the
investment portfolio at 'BB'. After applying our foreign currency sovereign
stress scenario, we consider that Sogaz would likely retain positive
regulatory capital and maintain a liquidity ratio in excess of 100%. We
believe that Sogaz is unlikely to default on its insurance liabilities under
the scenario. Therefore, the ratings on Sogaz can be higher than our 'BB+'
long-term foreign currency rating on Russia, but are limited by the 'BBB-'
long-term local currency rating on Russia. We would currently not rate Sogaz
more than one notch above the foreign currency rating on Russia, owing to the
company's substantial exposure to its Russia-based assets.

The stable outlook reflects our view that Sogaz will likely maintain
moderately strong capital and earnings, and at least less-than-adequate
investment quality under our methodology. We also think the company will
continue to benefit from its strong ties with Russian vertically integrated
gas company Gazprom OAO. A positive rating action on Sogaz is unlikely within
the next 12 months.

INGOSSTRAKH INSURANCE CO.
We have lowered our long-term counterparty credit ratings on Ingosstrakh
Insurance Co. to 'BB+' from 'BBB-' and our Russia national scale ratings to
'ruAA+' from 'ruAAA'. At the same time, we removed the ratings from
CreditWatch negative where we placed them on Dec. 29, 2014. The outlook is
negative.

The downgrade reflects our revision of the business risk profile to fair from
satisfactory, driven by our change in our assessment of the insurance industry
and country risks. It specifically reflects our concerns of potentially
reduced growth levels and the rising costs of imported spare parts, which puts
loss ratios in motor insurance under significant pressure.

We note, however, that Ingosstrakh's preliminary performance results for 2014
are above our expectations.

The outlook mirrors that on the sovereign and reflects the risk that a
sovereign foreign currency default could undermine liquidity at Ingosstrakh.


OSAO RESO GARANTIA
We have lowered our long-term counterparty credit rating to 'BB' from 'BB+'
and our Russia national scale rating to 'ruAA' from 'ruAA+'. We also removed
the ratings from CreditWatch negative where we placed them on Dec. 29, 2014.
The outlook is stable.

The downgrade reflects our revision of the business risk profile to fair from
satisfactory, driven by our changed view of insurance industry and country
risk. We kept the financial risk profile at weak. However, we revised our
assessment of the capital and earnings to less than adequate from lower
adequate, which reflects weakening of capital adequacy. Capital adequacy is
pressured following the company's investments in Reso Leasing and the
resulting goodwill which we fully deduct from the company's capital. We also
revised the company's financial flexibility score to adequate from less than
adequate, which reflects our expectations that, in 2014-2017, OSAO Reso
Garantia will be able to maintain its financial leverage below 30% and fixed
charge coverage above 4x. Our expectations are supported by the fact that the
company significantly decreased its leverage in 2014, by reducing debt to
about Russian ruble (RUB)11 billion from RUB21 billion in 2013.

The stable outlook on OSAO RESO Garantia reflects our expectation that the
company will be able to maintain its strong competitive position, in
particular on the motor market. We expect that the company will be able to
keep leverage at less than 30% and fixed charge coverage above 4x. However, we
don't expect the financial profile to improve from its currently weak level.

ROSGOSSSTRAKH OAO AND ROSGOSSTRAKH OOO
We have affirmed the long-term rating on OAO Rosgosstrakh at 'BB-' and the
Russia national scale rating at 'ruA+'. The outlook is negative.

We have revised our business risk assessment for OAO Rosgosstrakh to
satisfactory from strong, driven by our revision of the IICRA. We continue to
consider the company's competitive position as strong.

With strong positions in motor risk, the company enjoys strong brand
recognition, and has a superior distribution network to those of its domestic
peers.

The company's financial risk profile is very weak. This assessment reflects
capital and earnings that are less than adequate and the company's high risk
position. The company's high risk position is due to significant
related-party, sector, and single name concentrations.

The rating on the Rosgosstrakh group's main operating entity, Rosgosstrakh
OOO, is at the same level as the rating on Rosgosstrakh OAO because
Rosgosstrakh OOO is 99.9% owned by Rosgosstrakh OAO and we view it as a core
subsidiary. Rosgosstrakh OOO is the largest operating company within the
Rosgosstrakh group. It constitutes 80% of the consolidated group's total
assets, accounts for close to 90% of its total capital, and contributes 90% of
its gross premium written.

The negative outlook on Rosgosstrakh OAO reflects the possibility that the
company could fail to keep its capital adequacy within the less-than-adequate
category over the next three years. We believe that potential underperformance
by the insurance portfolio, in particular the motor portfolio, could weaken
retained profits. We also note that the company was growing at higher than
market pace in 2014, pressuring capital with growing premium charges.

SOGLASIE
We have affirmed the long-term rating on Soglasie at 'BB-' and Russia national
scale rating at 'ruAA-'. The outlook is stable.

We revised our business risk assessment to vulnerable from fair, driven by our
revision of the IICRA. We continue to consider the company's competitive
position as adequate. The weak financial risk profile reflects our view of the
company's lower adequate capital and earnings and high risk position. Our
capital assessment also takes into account that, in line with our projections
in January 2015, the shareholder provided a RUB2 billion capital injection to
Soglasie.

At the same time, we removed one notch of adjustment to the final rating which
incorporated an expected worsening of the macroeconomic environment and our
view of the weakening insurance environment. We have now reflected this risk
in our weaker IICRA assessment.

The stable outlook reflects our expectation that Soglasie will maintain its
adequate competitive position, combined with lower adequate capital and
earnings.

We could take a negative rating action on Soglasie if we see no financial
support from the main shareholder in 2016, which could put pressure on capital
and earnings; if the company experiences more losses on its portfolio than we
currently project; or if we view the quality of the investment portfolio as
weak.

If we consider that liquidity poses severe risks to Soglasie's operations and
its activity as a going concern, we are likely to cap the rating at 'B-' at
best. A positive rating action on Soglasie is unlikely within the next 12
months.


VTB INSURANCE
We have affirmed our long-term counterparty credit ratings on VTB Insurance at
'BB+' and our Russia national scale ratings at 'ruAA+'. We have revised
downward our assessment of VTB Insurance's stand-alone credit profile to 'bb'
from 'bb+'. The change reflects our revision of the business risk profile to
vulnerable from fair, driven by our revised view of insurance industry and
country risk. We consider VTB Insurance Ltd. as core to its parent,
government-owned VTB Bank JSC. We now add one notch of support to the rating
on VTB Insurance to reflect this. The outlook on VTB Insurance is negative,
mirroring that on the parent.

Company: VTB Insurance

Full company nameLimited liability company «VTB Insurance»
Country of riskRussia
Country of registrationRussia
IndustryFinancial institutions

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