07.04.2015, 09:00
Fitch Downgrades GEFEST to 'B'; Puts on RWN
OREANDA-NEWS. Fitch Ratings has downgraded JSIC GEFEST (Russia)'s (GEFEST) Insurer Financial Strength (IFS) rating to 'B' from 'B+' and its National IFS rating to 'BBB(rus)' from 'A(rus)' and put the ratings on Rating Watch Negative.
KEY RATING DRIVERS
The downgrade of the ratings reflects a significant weakening of GEFEST's capital and liquidity position resulting from a sharp deterioration in its operating performance. The RWN takes into account the breach of the regulatory solvency margin by the insurer and the potential need for capital support.
GEFEST's regulatory solvency margin declined to 110% at end-2014 from 181% at end-2013, below the minimum required 130%. This breach resulted from a net loss of RUB342m recorded by the insurer in 2014 in its local GAAP-based reporting, which was a significant deterioration from net income of RUB22m in 2013 and a long track record of positive financial performance since at least 2003. This net loss eroded the insurer's adjusted equity by 35% to RUB588m at end-2014.
According to the legislation in the construction industry, the government excluded the coverage of insurance costs from the construction contracts in 2014 and this has resulted in a significant contraction of the construction insurance segment. Changes to GEFEST's business mix, spurred by increased competition for lesser amount of business in construction insurance (the company's primary niche), have not helped the insurer to improve its underwriting performance. The restructuring of GEFEST's portfolio took place as total premiums written declined 15% on a gross basis and 20% on a net basis in 2014 compared with 2013.
The increased weight of motor business in GEFEST's portfolio and a reduction in the core commercial and property insurance business led to an increase of the loss ratio to 46% in 2014 from 38% in 2013. Additionally, the restructuring of the portfolio towards lesser known lines outside of the insurer's niche resulted in a deterioration of the commission ratio. Although the insurer achieved some modest improvement in its administrative expenses, this did not prevent a sharp deterioration of the combined ratio to 120% in 2014 from 98% in 2013.
A write-off of RUB81m (2013: RUB41m) insurance receivables has also added to the formation of the net loss in 2014.
The move towards shorter-term lines of business has also triggered a weakening of the insurer's liquidity position, with liquid assets-to-net technical reserves deteriorating to 45% at end-2014 from 79% at end-2013. Additionally, the insurer has all its liquid assets concentrated within an affiliated non-rated small bank.
RATING SENSITIVITIES
The RWN could be removed if the insurer restores its regulatory solvency compliance in a short term.
KEY RATING DRIVERS
The downgrade of the ratings reflects a significant weakening of GEFEST's capital and liquidity position resulting from a sharp deterioration in its operating performance. The RWN takes into account the breach of the regulatory solvency margin by the insurer and the potential need for capital support.
GEFEST's regulatory solvency margin declined to 110% at end-2014 from 181% at end-2013, below the minimum required 130%. This breach resulted from a net loss of RUB342m recorded by the insurer in 2014 in its local GAAP-based reporting, which was a significant deterioration from net income of RUB22m in 2013 and a long track record of positive financial performance since at least 2003. This net loss eroded the insurer's adjusted equity by 35% to RUB588m at end-2014.
According to the legislation in the construction industry, the government excluded the coverage of insurance costs from the construction contracts in 2014 and this has resulted in a significant contraction of the construction insurance segment. Changes to GEFEST's business mix, spurred by increased competition for lesser amount of business in construction insurance (the company's primary niche), have not helped the insurer to improve its underwriting performance. The restructuring of GEFEST's portfolio took place as total premiums written declined 15% on a gross basis and 20% on a net basis in 2014 compared with 2013.
The increased weight of motor business in GEFEST's portfolio and a reduction in the core commercial and property insurance business led to an increase of the loss ratio to 46% in 2014 from 38% in 2013. Additionally, the restructuring of the portfolio towards lesser known lines outside of the insurer's niche resulted in a deterioration of the commission ratio. Although the insurer achieved some modest improvement in its administrative expenses, this did not prevent a sharp deterioration of the combined ratio to 120% in 2014 from 98% in 2013.
A write-off of RUB81m (2013: RUB41m) insurance receivables has also added to the formation of the net loss in 2014.
The move towards shorter-term lines of business has also triggered a weakening of the insurer's liquidity position, with liquid assets-to-net technical reserves deteriorating to 45% at end-2014 from 79% at end-2013. Additionally, the insurer has all its liquid assets concentrated within an affiliated non-rated small bank.
RATING SENSITIVITIES
The RWN could be removed if the insurer restores its regulatory solvency compliance in a short term.
The ratings could be downgraded if there is no capital support from shareholders in the short term or if the liquidity position weakens further.
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