Fitch Ratings rates Russian National Reinsurance Company 'BBB-', stable outlook

Fitch Ratings has assigned Joint Stock Company Russian National Reinsurance Company (RNRC) an Insurer Financial Strength (IFS) rating of 'BBB-'. The Outlook is Stable.

"The rating's acquirement is linked not only to the fulfilling of the regulatory requirements but also to achieving our strategically targets on the international market. For the begging we plan to develop business with the markets from Eurasian Economic Union/CIS countries, BRICS, Eastern Europe, Latin America, North Africa, Middle East and Asia-Pacific region" RNRC's President, Nikolay GALUSHIN said.

The company's strategy proposes to obtain a share of 20% of the international business in its portfolio by 2021.

In argumenting it's rating decision, the Fitch stated in a press release:

KEY RATING DRIVERS The rating reflects RNRC's 100% ownership by the Central Bank of Russia, which has issued a capital support agreement in its favour. RNRC's rating also benefits from a strong business profile underpinned by specific legislation, management expertise, and a conservative investment strategy. Offsetting these positive rating factors is RNRC's exposure to concentration risk in the short-term as the reinsurer expands its portfolio away from sanctioned risks.

RNRC is a reinsurance company founded in August 2016 to develop the local reinsurance market in Russia and to reinsure risks assumed by local insurance companies related to sanctioned businesses. Regulations oblige local primary insurers to offer 10% of reinsured business to RNRC. It is, however, only obliged to accept risks related to sanctioned businesses. Commitment from the Central Bank of Russia to support the company is evidenced by a capital support agreement dated May 2017 by further capital injections on the maximum amount of RUB49.7 billion. This was to cover equity decrease below RUB21.3 billion due to losses occurring under sanctioned business agreements. Reinsurance of Russian sanctioned business is one of the areas RNRC works in under the law based on which the company was established. It includes reinsurance of property, cargo or marine risks related to military and double-use products and industries, reinsurance of risks underwritten in Crimea, and some one-off large projects. The share of sanctioned business in RNRC's portfolio is forecast not to exceed 10%-15% by 2021, assuming stable absolute amounts of sanctioned business and the growth of RNRC's non-sanctioned insurance portfolio.

Fitch views RNRC's role as reinsurer for sanctioned risks as positive for the company's strategic value to the Russian Federation and Central Bank of Russia. RNRC's management team possesses extensive expertise and deep knowledge of the insurance industry. Most of the managers have a long track record of experience working in leading Russian insurance companies, including companies focused on corporate business. Fitch believes that the expertise of the company's management will be beneficial for the development of the company and will allow it to reach the strategic goals set by the shareholder.

Based on the business plan for 2017-2021, RNRC is expected to be profitable with a return on equity of 12% in 2017 and of 19% in 2021. Average premium growth is expected to reach 35% per year from 2017 to 2021. Net income will be underpinned by strong underwriting and robust investment income. The combined ratio is forecast to reach 59% in 2017 and to 66% in 2021.

As regulations require RNRC to be offered a share of business reinsured by Russian insurers, Fitch believes this business plan is achievable. Given the obligatory 10% cessions which direct insurers are obliged to offer to RNRC the company's insurance portfolio is subject to concentration risk. To mitigate this risk the company has implemented a number of internal procedures. The company monitors concentration risk per object and per territory and declines non-sanctioned risks in excess of these internal limits. Fitch views RNRC's investment strategy as prudent and conservative from a local capital markets perspective, with government fixed-income instruments accounting for 91% of total investments at end-2016. The company maintains good credit quality in its investment portfolio relative to its local peers, investing in government bonds and placing deposits with state-owned banks.

RATING SENSITIVITIES RNRC's IFS Rating will likely be downgraded if Russia's Long-Term Local Currency Issuer Default Rating is downgraded. The rating could also be downgraded if RNRC's strategic role in the Russian reinsurance market or its ownership structure were to change. The rating could be upgraded if Russia is upgraded while RNRC's strategic role is being maintained.

More about RNRC's strategy here.  

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