OREANDA-NEWS. S&P Global Ratings said today that it has revised its outlook on Russia-based Insurance Company RESO-GARANTIA to positive from stable.

At the same time, we affirmed our 'BB' insurer financial strength and counterparty credit ratings and 'ruAA' Russia national scale rating on the company.

The outlook revision stems from our view that RESO-GARANTIA can maintain its current capital adequacy and strong competitive position, and is unlikely to undertake any unexpected sizable acquisitions over the next 12 months.

In our view, RESO-GARANTIA's capital adequacy, according to our measures, improved to lower adequate after strong underwriting performance in 2015 relieved some of the pressure from goodwill on acquisitions. The company has not distributed profits for several years, which has supported its capital adequacy. In our base-case scenario, we don't anticipate dividend payouts in 2016. Due to sufficient internal capital generation, capital adequacy at year-end 2015 was less under pressure from the company's investments in RESO-Leasing, which we deduct in our calculation of the company's capital.

We still consider the company's capital to be modest in absolute terms, at about Russian ruble (RUB) 36 billion (or $494 million) as of year-end 2015, compared with that of international peers.

The combination of lower adequate capital adequacy, a moderate risk position, and adequate financial flexibility led us to revise our assessment of RESO-GARANTIA's financial risk profile to less than adequate from weak. Although, a fair business risk profile and less than adequate financial risk profile lead to an anchor of 'bb+', we deduct one notch to reflect the following factors:Net income appeared exceptionally high in 2015 compared with the very low result in 2014, so we would need to see a track record of sustainable bottom-line results in line with a five-year average of about RUB5 billion. The challenging economic environment can pose additional risk, in particular, related to the underwriting results of the motor portfolio. RESO-GARANTIA's derisking in 2015 indicated a more conservative investment strategy. However, owing to the limited history of derisking, we would need to see the sustainability of such an approach over the next 12 months. RESO-GARANTIA has a strong competitive position, in our view, primarily because of its established market share (7.6% of total domestic gross premiums written in 2015) and sound operating results compared with those of its Russian peers. The company is well positioned in the motor market and has good brand recognition, product expertise, and a loyal distribution network. We view these factors as a significant strength in relation to the company's peers.

We understand that the net combined (loss and expense) ratio of close to 90% in 2015 was partly driven by a tariff increase for obligatory motor insurance in that year and is better than those of peers in the Russian market. In our base-case scenario, we assume RESO-GARANTIA will demonstrate sound underwriting performance, with a combined ratio below 100%. The returns on revenue and equity are likely to be at least 7% and 12%, respectively, largely because, according to our estimates, the company's net profit in 2016 will be about RUB5 billion. However, the final figure will depend on the company's future investment results, underwriting performance, and its appetite for acquisitions.

In our view, RESO-GARANTIA has a moderate risk position, reflecting an investment portfolio concentrated in the banking sector, with the weighted average quality of rated investments in our 'BB' category. RESO-GARANTIA is exposed to market risk, owing to its structural long foreign currency position, with 42% of assets denominated in foreign currency. However, the company tries to match assets and liabilities.

The positive outlook indicates that we could raise the ratings if RESO-GARANTIA can sustain at least lower adequate capital adequacy via sound net profit at least at RUB5 billion, refrain from unexpected sizable acquisitions, and maintain its strong competitive position within the next 12 months. We expect that the company will keep leverage at less than 40% and fixed-charge coverage above 4x.

We could revise the outlook to stable if the company's financial risk profile were to deteriorate over the next 12 months, such as from:A decline in capital adequacy to less than adequate, due for example to very high dividend payouts, unexpected underwriting or investment losses, an increase in financial leverage beyond 40%, or fixed-charge coverage consistently below 4x; or An increase of single-name concentration risk (excluding systemically important banks in Russia and bonds of government-related entities) in the investment portfolio beyond 10%, or concentration in a single sector beyond 30%.