Training on sovereign risk credit analysis, October 24

ACRA assigns ААА(RU) to JSC Russian National Reinsurance Company, outlook Stable

The credit rating of JSC Russian National Reinsurance Company (hereinafter – RNRC, or the Company) is based on its very strong business and financial profiles coupled with high-quality management. The factor of support by the Bank of Russia has been defined as relatively strong, however it will have no impact on the Company’s final credit rating, as the latter already boasts the maximum possible standalone creditworthiness assessment.

RNRC is a specialized reinsurance company incepted in accordance with Article 13.1 of the Federal Law “On insurance business in the Russian Federation.” With its sole shareholder being the Bank of Russia, the company was incepted for providing additional protection of policyholders’ property interests in the environment of international sanctions.

Key rating assessment factors

Very strong business profile of the Company is premised upon its stable market position and very strong operating performance expected in the short and medium term. By ACRA’s criteria, the Company’s customer base diversification is below average due to a high proportion of individual customers in the reinsurance portfolio. This is partially mitigated by companies being bound to transfer to RNRC part of reinsurance premium. ACRA assesses the Company’s product range quality as high, as RNRC possesses underwriting competence across almost all important insurance and reinsurance types. Sales channels pertaining to insurance products are non-diversified, with more than 90% of premiums coming in the form of mandatory cession. Nevertheless, this sales channel is practically devoid of risks, so the Company’s service distribution system as exceptionally reliable.

Operating efficiency of RNRC is assessed as high, with the combined ratio expected to fetch 0.6 by year-end 2017 and growth rates anticipated to significantly exceed the market average in 2017-2019.

Very strong financial profile rests on high capital adequacy, high asset quality and strong liquidity.

The ratio of available capital and capital at risk, calculated according to the ACRA methodology, stands at 2.3, which, combined with assessments of other indicators, defines the Company’s capital adequacy as high.

A high assessment of RNRC’s assets is supported by the Company investing mainly in low-risk assets while maintaining its capital-to-assets ratio at an exceptionally high level (0.99 at end-2016 and 0.83 expected at end-2017).

Strong liquidity is premised upon assessments of short and long term liquidity ratios that are forecasted to fare 4.9 and 5.6 respectively by end-2017.

Management quality of the Company is regarded as high based on positive assessments of all factor components.

High probability of RNRC receiving extraordinary support from the Bank of Russia if needed. A very high degree of state influence on the Company is manifested through the government exercising shareholder and operational control over it, RNRC’s participation in government projects, and via an expected provision of an option to purchase additional shares in case of partial forfeiture of charter capital due to losses related to sanctions risks. That said, the Company’s systemic importance to date is assessed as medium. In combination, these assessments may entail a three-notch upward adjustment of the Company’s standalone creditworthiness assessment, in accordance with the ACRA methodology.

Key assumptions

  • Retaining the key legislative provisions defining RNRC’s status within the 3-year horizon;
  • The Bank of Russia remaining the controlling shareholder within the 3-year horizon;
  • Sustaining the current policies governing risk management, investments and underwriting (i.e. retaining the Company’s business model) within the 3-year horizon.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A negative rating action may be prompted by:

  • A downgrade of the Company’s financial profile assessment coupled with a decline in probability of extraordinary support provision by the Bank of Russia.

Rating components

Standalone creditworthiness assessment (SCA): ааа.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Insurance Companies Under the National Scale for the Russian Federation, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Relationships Between Rated Entities and the State.

A credit rating has been assigned to JSC Russian National Reinsurance Company for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (April 28, 2017).

Disclosure of deviations from approved methodologies. The modified Herfindahl-Hirschman index used for assessing diversification of sales channels was calculated with a zero coefficient for the "Mandatory Cession" sales channel in view of the letter’s legislatively defined character.

The assigned credit rating is based on the data provided by JSC Russian National Reinsurance Company, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS and RAS statements of JSC Russian National Reinsurance Company. The credit rating is solicited, and JSC Russian National Reinsurance Company participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by JSC Russian National Reinsurance Company in its financial statements have been discovered.

ACRA provided no additional services JSC Russian National Reinsurance Company. No conflicts of interest were discovered in the course of credit rating assignment.

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