OREANDA-NEWS. Fitch Ratings has affirmed AlfaStrakhovanie PLC (Russia)'s (AlfaStrakhovanie) Insurer Financial Strength (IFS) rating at 'BB' and its National IFS rating at 'AA-(rus)'. The Outlooks are Stable.

KEY RATING DRIVERS
The affirmation and Stable Outlooks reflect AlfaStrakhovanie's relative resilience to the recessionary developments in the Russian economy. The ratings also reflect AlfaStrakhovanie's strategic importance to its parent (Alfa Group), the track record of capital support from the parent and Fitch's view that this support is likely to continue to be available in the future. The ratings also take into account AlfaStrakhovanie's low risk-adjusted standalone capital position and its limited ability to generate capital internally. To some extent, these risks are mitigated by historically effective measures taken by the insurer to shield capital from large losses, through a prudent investment policy and appropriate reinsurance protection.

The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the rouble, coupled with a steep rise in interest rates. Having grown by just 0.6% in 2014, Fitch expects the Russian economy to contract by 4% in 2015, as steep falls in consumption and investment are only partially offset by an improvement in net exports, driven by a sharp drop in imports. Growth may not return until 2017.

Fitch expects that pressure on profit is likely to continue for Russian insurers in 2015 as the recession will reduce premium volumes. Fitch expects the Russian insurance sector's underwriting results to have been negative in 2014 as premium growth fell, especially in the most profitable segments, and loss ratios increased. Double-digit inflation and the sharp depreciation of the rouble were further burdens.

AlfaStrakhovanie expects to report an improved net profit of RUB0.7bn in 2014 (2013: RUB0.4bn), which would reflect a combination of a negative underwriting result, a strong investment result and significant FX gains made mainly on investments. However, the performance of AlfaStrakhovanie's medical subsidiary continues to be drag on the insurer's consolidated income.

AlfaStrakhovanie expects to report only a modest worsening of the combined ratio to 102.3% in 2014 from 101.8% in 2013. This worsening was largely driven by the commission ratio, which deteriorated to 31.4% in 2014 from 28.9% in 2013. At the same time, the insurer expects to report an improvement in the loss ratio to 62.6% from 66.1% in the same period, mainly due to the motor third party liability and household property insurance.

The insurer also expects to report a significant negative underwriting result for its life insurance subsidiary due to a significant proportion of US dollar-denominated participating products. However, the insurer has offset this loss with FX gains on dollar-denominated bonds purchased explicitly to hedge the FX risk on the liability side.

RATING SENSITIVITIES
An upgrade is unlikely given the deteriorated operating environment and weakened sovereign profile.

The ratings could be downgraded if AlfaStrakhovanie reports 2014 results below expectations or negative earnings in 2015. The ratings could also be downgraded if its shareholders fail to support the insurer's risk-adjusted capitalisation if it weakens as a result of weakened profitability or the pursuit of growth.