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Fitch Revises GEFEST's Outlook to Negative; Affirms at 'B+'

September 26, 2014 | Fitch Ratings

26 September 2014: Fitch Ratings has revised the Outlook on JSIC GEFEST (Russia)'s (GEFEST) Insurer Financial Strength (IFS) rating and National IFS rating to Negative from Stable and affirmed the ratings at 'B+' and 'A(rus)' respectively.
KEY RATING DRIVERS
The revision of the Outlooks reflects GEFEST's movement towards non-core lines of business, caused by the increased competitive pressure in the insurer's primary niche of construction insurance. This increased weight of motor lines in GEFEST's portfolio is likely to challenge the insurer's ability to generate profit through underwriting, particularly taking into account the current unfavourable operating environment in the Russian motor insurance segment. The move towards shorter-term lines of business may also delay the strengthening of the currently weak liquidity position of the insurer.
The weight of the insurer's core commercial property and casualty insurance has decreased to 55% in 1H14 from 69% in 1H13 (2013: 68%) in gross premiums written. The decrease was even more pronounced on net basis - to 47% in 1H14 from 68% in 1H13 and 64% in 2013. The changes in the business mix took place in the context of a decline of total premiums written by 11% on gross basis and by 16% on net basis in 1H14 compared with 1H13.
GEFEST has retained strong underwriting expertise in local construction insurance, but the weight of this factor has weakened, as government-financed construction projects are increasingly concentrated with a few leading insurers. GEFEST's medium-term ability to withstand competitive pressure is uncertain. Given the insurer's track record, Fitch does not expect that the insurer will pursue a speculative pricing strategy to maintain its market share.
The insurer's combined ratio weakened to 102.5% in 1H14 from 98.8% in 1H13 and 98.1% in 2013 (local GAAP-based calculations), with the increased level of acquisition costs on motor lines being the key driver behind this deterioration. On the positive side, Fitch notes that GEFEST has managed to achieve some moderate economies on its administrative expenses in response to the declining premiums volumes.
GEFEST's liquidity remains weak with the ratio of liquid assets to net technical reserves at 67% at end-1H14. This reflects negative operating cash flow due to the increasing weight of short-term lines of business, primarily motor insurance. It also reflects legacy issues, including a large dividend distribution in 2011 and sizeable premium refunds under some construction insurance contracts in 2012 when the project owners stopped their financing. The insurer repaid its short-term RUB100m debt in 4Q13, but plans to borrow again to support its liquidity position.
Based on its own assessment, Fitch believes that GEFEST's risk-adjusted capital position is strong relative to net business volumes, particularly when taking into account the limited historical volatility of the loss ratio. At the same time, Fitch believes that GEFEST's exposure to investment-related risks creates pressure on capital adequacy due to significant low-rated or affiliated investments.
Fitch views GEFEST's investment portfolio as of moderate credit quality. The insurer held 40% of its investments or 20% of its equity in the form of cash or bank deposits with a small, unrated affiliated bank at end-1H14. Positively, GEFEST's investment strategy remains conservative and focused on bank instruments, which accounted for 90% of the portfolio at end-1H14.
RATING SENSITIVITIES
The insurer's ability to manage its portfolio with a positive underwriting result as well as a sustainable liquidity strengthening trend could lead to a revision of the Outlooks to Stable.
Conversely, evidence of a permanent structural decline in GEFEST's underwriting performance, indicated for example by a combined ratio over 105%, on a sustained basis, could lead to a downgrade. The ratings could also be downgraded if there is further weakening of the liquidity position, loss of underwriting expertise or an irrecoverable loss of market position in the construction insurance market.

Company: Gefest CO

Full company nameGefest
Country of riskRussia
IndustryFinancial institutions

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