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Fitch Downgrades GEFEST to 'B+'; Outlook Stable

April 26, 2010 | Fitch Ratings

Fitch Ratings-Moscow/London-23 April 2010: Fitch Ratings has today downgraded JSIC GEFEST's (GEFEST) Insurer Financial Strength (IFS) rating to 'B+' from 'BB-' and its National IFS to 'A(rus)' from 'A+(rus)'. The Outlooks are Stable.

The downgrade reflects deterioration in GEFEST's underwriting performance and a notable contraction in premiums in 2009. Although GEFEST has retained its market position as a strong niche player, its key construction insurance segment has been more significantly affected by the economic downturn than the overall Russian insurance sector.

The Stable Outlook reflects the improved quality of GEFEST's investment portfolio at end-2009, which has been largely restructured towards marketable fixed-income instruments of a relatively good credit quality. The overall quality of the balance sheet has also improved upon the write-off of poor quality insurance receivables accumulated over several years.

Fitch notes that the deterioration in the combined ratio to 88.5% in 2009 from 62.2% in 2008 was largely driven by inadequate expense management, particularly in the context of the contraction in premiums. In addition, GEFEST's loss ratio increased to 28.8% in 2009 from 16.4% in 2008, marking a return to its average levels of 2005-2007. This was driven by intensified claims, loss reserves fluctuation after the statutory releases in 2008 and a moderate increase in the cost of obligatory protection for the CAR/EAR line in relation to the reduced premium volumes.

Fitch continues to view GEFEST's underwriting expertise in its key CAR/EAR segment as one of its strong points, although the agency foresees additional challenges for the further successful management of the underwriting result. Such challenges include the persisting soft phase in the local sector's cycle, potentially increasing diversification of the portfolio away from the traditional CAR/EAR business and the insurer's relatively inflexible expense levels. The recent large claim relating to port infrastructure damaged by a storm in Sochi is not expected to lead to a dramatic decrease in GEFEST's net underwriting result in 2010 due to the insurer's relatively low net retention and adequate reinsurance protection.

Fitch also notes the presence of financial risks in GEFEST's portfolio, and the insurer's willingness to take a leading position in a new relatively lesser known casualty segment. Although GEFEST's net premiums written considerably contracted in 2009, leading to reduced capital requirements, the agency notes that the insurer's business mix might require a more conservative assessment of the risks on the liability side of the insurer's balance sheet and its potential capital needs in the next few years. Capital is currently in line with the rating level, but Fitch notes that GEFEST has relatively limited financial flexibility. The successful realisation of the insurer's plans to attract fresh capital injections from shareholders in mid-2011 would be viewed as a positive rating factor, provided the company continues to adhere to a conservative investment strategy.

Fitch notes the weakening of the ratio of GEFEST's liquid assets to technical reserves, driven by the sharp contraction in premium volumes and negative operating cash flow in 2009. One shareholder has extended short-term credit to GEFEST to prevent possible cash gaps relating to the settlement of the large claim in Sochi and the collection of reinsurance recoveries. Fitch believes that the company's liquidity position may start improving as premium volumes stabilise. According to GEFEST's estimates, growth will recover in 2010, although premiums are not expected to reach the peak level of 2008.

Company: Gefest CO

Full company nameGefest
Country of riskRussia
IndustryFinancial institutions


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