The credit rating of Joint-Stock Company «Sovcombank insurance» (hereinafter, «Sovcombank insurance» (JSC), or the Company) is based on the strong business profile assessment, average financial profile, adequate management quality, and support from the shareholder, JSC Sovcombank (ACRA rating: A+(RU), outlook Stable, hereinafter, Sovcombank, the Supporting Organization, or the SO). Sovcombank is the parent company of Sovcombank Group (hereinafter, the Group).
«Sovcombank insurance» (JSC) (previously known as Insurance Company Class, OJSC KIT Finance Insurance, and Liberty Insurance (JSC)) is a universal insurance company that has operated in the Russian insurance market since 1993. In February 2020, Sovcombank acquired the Company from American insurance group Liberty Mutual, which had owned it since 2012. In 2019, the Company was 37th in terms of collected insurance premiums, and 14th and 15th in the voluntary health insurance and motor hull insurance segments, respectively.
The Company’s strategic plans as part of the Sovcombank Group include broadening its national presence, increasing its share of the insurance market, and increasing the efficiency of operations by integrating part of its business processes with Sovcombank, and also through participation in joint projects. «Sovcombank insurance» (JSC) aims to leverage the Group’s rather strong positions in the car loans and car leasing markets in order to grow its vehicle insurance portfolio.
Key rating assessment factors
The Company’s strong business profile stems from its stable market position and fairly strong operating indicators expected in the near future and the medium term.
The sales channels of «Sovcombank insurance» (JSC) are highly diversified. Direct sales accounted for around 40% of the Company’s portfolio in 2019, while 25% of agreements were concluded by brokers, and 24% were concluded by agent car dealers. ACRA expects the bank sales channel to grow significantly following Sovcombank’s acquisition of the Company. The diversification of the client base and quality of the product range are assessed as average. The Company’s clients are mainly concentrated in Saint Petersburg and Moscow — 52% and 28% of insurance premiums in 2019, respectively. ACRA expects the shares of these cities to decrease, and, as a result, an increase in the diversification of the client base because the Company will start selling retail insurance products where Sovcombank is present. The Company’s insurance portfolio is moderately diversified, with the following accounting for premiums collected in 2019: motor hull insurance (28%), voluntary health insurance and travel insurance (21%), obligatory motor third-party liability insurance (15%), financial risk insurance (14%), and personal property insurance (8%). As in previous years, the Company’s development priorities going forward are motor insurance and mortgage insurance.
The assessment of the Company’s operating indicators is based on the assessment of its business prospects. Over the past three years, the rate of growth of the Company’s insurance premiums has exceeded the market average. ACRA expects this growth to continue to outstrip the market rate, partially thanks to the use of Sovcombank’s sales channels. The combined loss ratio (CLR) for 2019 was 101%, while the loss ratio for the same period was 46%. The level of acquisition costs for insuring financial risks puts significant negative pressure on the CLR. ACRA expects the CLR to equal less than 100% in the future.
The average financial profile assessment is determined by the capital adequacy assessment. However, asset quality and liquidity assessments are at a higher level compared to capital adequacy and do not affect the final assessment of the financial profile.
According to ACRA’s methodology, the ratio of available capital to capital at risk, calculated as of December 31, 2019, is 1.11. Combined with the average level of absolute capital, this defines the Company’s capital adequacy as average. A significant amount of deferred acquisition costs (52% of equity) on the balance sheet is a limiting factor in calculating available capital.
The high asset quality assessment is due to the fact that the Company invests mainly in assets with low risks (risk index 2.2) and maintains a high capital to asset ratio (0.27). The concentration of assets according to ACRA’s criteria is at an acceptable level and does not affect the assessment of asset quality.
The Company’s adequate liquidity position is based on current and long-term liquidity ratios — 1.12 and 1.2, respectively.
1 Taking into account financial assistance that the Company received from a new shareholder in March 2020 in the amount of RUB 80 mln.
Management quality is assessed as adequate given the Company’s positive risk management and corporate governance assessments, as well as strategic vision and management.
Moderate probability of extraordinary support from the Supporting Organization. According to ACRA, the Supporting Organization is interested in developing the Company’s business and can provide it with financial support if necessary. This conclusion is based on the following factors:
- Legal relationship (Sovcombank owns 99.99% of the Company);
- The Company received financial assistance in Q1 2020 in the form of cash contributions to capital from Sovcombank;
- The company is considered part of the Sovcombank Group when implementing its plans for the development of car loans and leasing.
Given the moderately strong assessment of the Supporting Organization’s category, as well as the strong assessment of the degree of connection between the Company and the Supporting Organization, ACRA has increased the level of the Company’s SCA by one notch.
- Implementing business plans in accordance with the management’s forecast within the 12 to 18-month horizon;
- Willingness on the part of the Supporting Organization to provide financial support to the Company;
- Maintaining asset management and underwriting policies.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Increased capital adequacy;
- Significant improvement in market position.
A negative rating action may be prompted by:
- Decreased operational indicators;
- Decreased ratio of available capital to capital at risk;
- Significant increase in asset concentration and decrease in capital to asset ratio.
Support: +1 notch to the SCA.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Insurance Organizations on the National Scale for the Russian Federation, the Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
A credit rating has been assigned to Joint-Stock Company «Sovcombank insurance» for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating is based on the data provided by Joint-Stock Company «Sovcombank insurance», information from publicly available sources, and ACRA’s own databases. The rating analysis was conducted using the GAAP and IFRS financial statements of Joint-Stock Company «Sovcombank insurance». The credit rating is solicited, and Joint-Stock Company «Sovcombank insurance» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Joint-Stock Company «Sovcombank insurance» in its financial statements have been discovered.
ACRA provided no additional services to Joint-Stock Company «Sovcombank insurance». No conflicts of interest were discovered in the course of credit rating assignment.