Fitch Assigns Negative Outlook on the Russian insurance sector

Fitch Ratings has assigned a Negative Outlook on the Russian insurance sector, reflecting expectations of a negative impact of the deteriorating situation in the insurance market due to the rapid deceleration of the Russian economy and the continuing volatility in investment markets of the country. "Negative" rating outlook also takes into account the lowering of Fitch's sovereign rating of Russia to the level of "BBB" to "Negative" forecast, in February 2009, "Profitability in the sector is likely to deteriorate in 2009 due to continued volatility in investment performance and pressure on profit from underwriting - said Lyuba Tarnopolsky, Director in Fitch's insurance sector. - Serious recessionary pressures already evident in Russia. The agency expects that this pressure can lead to an increase in the number of applications for insurance losses due to increased fraud in the insurance sector as well as the requirements relating to contractual commitments and financial guarantees, as businesses come under pressure from economic recession. " These factors, combined with a previously inadequate took place in the growing practice of reservation of immature segments, such as compulsory third party liability insurance (compulsory and) may lead to a significant reduction in positive cash flow and potential difficulties with liquidity. Fitch expects that the increase in insurance premiums have rated Russian insurers substantially slowed in 2009 compared with 32 percent growth the previous year against a background of zero GDP growth in Russia and seems likely a significant reduction in demand for insurance products. In the retail segment in particular, Fitch expects the conservation of intense competition for premiums and the resultant pressure on premium rates. Fitch is concerned that the overall low level of credit quality and liquidity of the investment portfolios of Russian insurers could have put further pressure on balance sheets. The continuing volatility in the Russian stock market and the growing risk of defaults on corporate bonds are urgent factors of concern, while the low liquidity of insurers selling involves the risk of investment in terms of falling prices. Investment portfolios of Russian insurance companies rated by Fitch, a relatively high proportion of shares (about 25% on average basis). In this case, about half of such investments - are shares for which there is no active stock trading and / or the credit quality of which is low. Fitch believes positive note a high proportion of cash and cash equivalents of companies rated by the insurance sector (about 60% of all investment assets), but notes the generally low credit quality of many organizations that host such deposits. In addition, Fitch stressed the relatively low proportion of bonds rated in Russian companies, which account for only about 16% of investment assets. While this reduces the exposure of companies to interest rate risk and credit risk spreads, the agency notes the relatively low credit quality of investments in bonds, about 15% of which belong to the issuers of unrated and are low liquidity. Only about 11% of the bond portfolio is represented by government bonds of the Russian Federation. Fitch notes that while the capital adequacy in the majority of Russian-rated insurance companies look stable for 2008, this was due mainly to the infusion of capital of five companies during the year. Other companies that have not received capital contributions from its shareholders, had deterioration in capital adequacy in relation to a combination of factors such as strong growth in premiums and losses on investments. Average regulatory solvency ratio of eight companies rated by Fitch as a result improved to 264% in 2008 (2007: 252%). Fitch notes that the expected slowdown in premium or reduction in premiums in 2009 are likely to lead to lower capital requirements for some insurance companies. Nevertheless, pressure on capital is likely, while maintaining investment losses and lower profits from underwriting. In addition, Fitch believes that insurers are owned by banks are now less likely to receive support from the capital, if necessary, in view of the pressure faced by many Russian banks. This will increase the dependence of such insurance companies on retained earnings as a source of generating capital. While the Russian government has provided capital support to banking sector, the support of insurance companies has not been announced, although, as far as Fitch, the regulator is actively considering possible measures for relief if the company sector have problems with solvency.