Western reinsurers face £200m hit if Russia’s Sogaz caught by sanctions

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Russian insurance giant places reinsurance at Lloyd’s and with major European reinsurers.

Further sanctions against Russia could cost up to £200m ($320.7m) in business placed with Western reinsurers if market leader, Sogaz, were to have international trade restricted, analysts have warned.

Lloyd’s, Munich Re, Swiss Re, Scor and Hannover Re are among those who would be affected if Sogaz were unable to place its reinsurance internationally as it does at present.

The warning comes at a time when looming recession in Russia is posing a major threat to the country’s insurers, which are already facing the impact of existing sanctions and falling oil prices.

The jurisdictions housing the world’s major reinsurers – the US, the EU, Switzerland, Bermuda, Japan and Australia – all have sanctions in place against Russia.

According to John Borgas, analyst at Equity Development, the Russian insurer most significantly affected by the sanctions is Sogaz, which has two of its shareholders among the list of sanctioned companies.

Sogaz has an approximate 10% market share in Russia and buys reinsurance from London and other Western market companies. Last year Sogaz changed its ownership structure, with previous majority-owner Bank Rossiya reduced to a minority shareholder after the bank was targeted by US sanctions.

A subsequent deal in August saw Gazprom buy a further 16% of the shares from Abros, meaning sanctioned companies now own less than 50% of the insurer.

But Borgas said the threat of Sogaz being included within the breadth of sanctions remains and, should this happen, he estimates the financial impact on the insurer could be as high as Rouble2bn ($48.2m), with Western reinsurers potentially hit by £200m of lost reinsurance.

“Reinsurance in the Western market of Russian mega-risks is currently essential since the sum at risk for a few of them exceeds the total capital and reserves of the top 10 Russian-owned insurers,” Borgas said.

Borgas said Western reinsurance is essential for risks such as Russian aviation, spacecraft, nuclear power and major oilfields.

The Central Bank of Russia has  now started a discussion about a state-owned reinsurer,which may have been triggered by earlier suggestions Sogaz should be sanctioned, which would be one solution, suggests Borgas.

“This is far from optimal since a nuclear accident, the costs of which had to be funded by the Russian state, would cause a double whammy, with the physical damage and a recession caused by the cost of diverting so much of the output of the economy into repairing that damage, compensating and providing medical care to victims.”

Western reinsurers made a profit of Rouble11bn from Sogaz in 2013, and if this business were to disappear it would knock roughly £30m off the profits of each of the major reinsurers that write the risks, according to Equity Development’s analysis.

This business could be retained if another Russian insurer not subject to sanctions were to write the primary risks instead of Sogaz.

The prospect of further sanctions would be heightened by any further aggressive international action from Vladimir Putin’s government.

At this week’s World Economic Forum in Davos, Nouriel Roubini, professor of economics and international business at New York University, said there were signs Putin was becoming more aggressive as a result of the impact of sanctions to date and low oil prices.

Roubini said the fall in oil prices was being perceived by Putin and potentially other countries affected by low oil prices as a push for regime change by the West.

The International Monetary Fund this week cited Russia’s economic woes as one of the factors leading to a cut in its global economic growth forecast to 3.5%, compared with a forecast of 3.8% issued last October.

And Russia’s insurers face a fall in premium volumes and subsequent reduction in profits as the recession bites.

A report from rating agency Fitch has warned double-digit inflation and the sharp depreciation of the rouble have also proved burdens to Russia’s insurance sector in recent months, with investment results also expected to be hit by negative revaluations of fixed-income securities. The rouble deteriorated 72% against the US dollar during 2014.

The reduction in profitability comes at a time when Russian insurers are suffering a deficit of capital, attributable in part to the Western sanctions which are blocking corporates from accessing external capital markets.

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