S&P: Russia-Based Insurers SOGAZ And VTB Insurance 'BBB-' Ratings Placed On CreditWatch Developing As Merger Progresses

S&P Global Ratings today placed its 'BBB-' long-term issuer credit and financial strength ratings on Russia-based insurers OJSC SOGAZ and VTB Insurance on CreditWatch with developing implications.

The CreditWatch placement follows the acquisition by SOGAZ of 100% of VTB Insurance, from Russian banking group VTB.

S&P explained its rating action as follows:

We now consider VTB Insurance to be core to SOGAZ, implying the ratings on VTB Insurance have been aligned and will now move in tandem with SOGAZ group's credit profile. SOGAZ will maintain its exclusive agreement with VTB Group to sell insurance products via the bank's extensive branch network. As part of the transaction, VTB Group has received a 10% share in SOGAZ.

We expect that, by 2020, VTB Insurance will be merged into SOGAZ. VTB Insurance represents a significant part of the SOGAZ group, accounting for more than 20% of consolidated capital and around 40% of the insurance portfolio. VTB Insurance's portfolio mostly comprises accident and health insurance, complementing SOGAZ's portfolio, which largely comprises property and corporate insurance.

The parties have not fully disclosed the transaction's financial terms, or figures pertaining to the consolidated entity. We understand that SOGAZ has not used any external financing to complete the transaction, which has been fully financed via internal resources.

We expect the combined entity will likely strengthen its market position in terms of earnings and competitive standing, which could benefit the SOGAZ group's credit profile. Estimated premium for 2019 stands at almost Russian ruble (RUB) 200 billion (US$3 billion), indicating that the consolidated group will have a share of more than 20% of the Russian insurance market.

Until further financial details become available, we are unable to fully assess the impact of the transaction on SOGAZ group's capital adequacy and investment composition. In particular, the impact of intangibles (goodwill and deferred acquisition costs) remains uncertain, as does the effect of any consolidation adjustments on the group's consolidated capital adequacy according to our model. We also have limited visibility on the level of diversification and average credit quality of the investment portfolio.

Placing the ratings on CreditWatch developing indicates that we could upgrade, affirm, or downgrade our ratings on SOGAZ's core operating entities, including VTB Insurance. The rating action will depend on the group's capital structure post-deal and on the successful strategic integration of the two insurers. It also reflects uncertainties regarding the final composition of the group's investment portfolio. We expect to resolve our CreditWatch placement over the next three to six months as the required financial information to assess its implications on the group's creditworthiness becomes available.

We could raise the ratings by one notch in the next three to six months if the consolidated entity maintains its sound levels of capital adequacy, according to our model, while strengthening its competitive position and upholding sound underwriting performance. The upgrade would also depend on the average credit quality of the fix-income portfolio moving firmly into our 'BBB' category and on our view that the larger SOGAZ group would be resilient to a hypothetical stress scenario of a foreign currency default of Russia.

We could affirm our ratings in the next three to six months if the consolidated entity maintains its sound levels of capital adequacy, according to our model, but its weighted-average investment profile remains around 'BB' and/or the combined entity does not pass our hypothetical stress scenario of a foreign currency default of Russia.

We could lower the ratings by one notch in the next three to six months if the capital position of SOGAZ combined with VTB Insurance were to materially deteriorate after the acquisition, compared with SOGAZ's previous stand-alone position.

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