A.M. Best Europe - Rating Services Limited has affirmed the financial strength rating (FSR) of B++ (Good) and the issuer credit rating (ICR) of "bbb" of SCHWARZMEER UND OSTSEE Versicherungs- Aktiengesellschaft SOVAG (Germany).

The outlook for both ratings remains stable.

SOVAG's ratings reflect its strong risk-adjusted capitalisation, improving operating performance and good business profile as a specialist insurer of Russian risks within Europe.

SOVAG's risk-adjusted capitalisation remained strong in 2011 and is expected to remain at a similar level for the coming year, supported by full retention of earnings. The company's capitalisation continues to be enhanced by an equalisation reserve, which at the end of 2011 amounted to EUR 36.5 million.

In 2011, SOVAG reported a small underwriting loss of EUR 0.9 million (2010: EUR 13.3 million). The improvement in SOVAG's technical performance was supported by a substantial prior year reserve release, as well as a better performance from the motor portfolio. The company intends to introduce a new pricing structure for its motor portfolio towards the end of 2012 (which represented 38 percent of net written premium (NWP) at year-end 2011) and is currently reviewing loss making contracts. These changes should lead to a gradual and sustained improvement in SOVAG's underwriting results. Given the company's large reserve release in 2011, it is unlikely that SOVAG's technical performance in 2012 will exceed the level of the previous year.

SOVAG maintains a niche position as a specialist insurer of risks emanating from Russia and the Confederation of Independent States, as well as a leading provider of insurance coverage for Russian immigrants in Germany. In January 2012, SOGAZ Insurance Company OJSC (SOGAZ) (Russia) increased its shareholding in SOVAG to 50.9 percent from 45.9 percent to become the majority shareholder. To date, SOVAG has mainly marketed its personal lines portfolio to Russian immigrants. However, the company is now actively targeting non- immigrant Germans with its personal lines products via small regional brokers. In 2012, with the implementation of the new motor pricing structure and an increase in business written for Russian companies with European interests facilitated by SOGAZ, NWP is likely to increase from EUR 63.0 million, which was reported in the previous year.

Upward rating movement in SOVAG's ratings could occur if there were marked and sustained improvements in the company's underwriting performance, as well as its business profile. However, this would be subject to the potential impact from SOGAZ's ratings.

Downward rating movement in SOVAG's ratings may be triggered if there were a deterioration in technical and/or overall results and a material decrease in risk-adjusted capitalisation. Additionally, negative rating actions could occur if there were a deterioration in the FSR of B++ (Good) and ICR of "bbb" (with a stable outlook) of SOGAZ.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilised include: "Catastrophe Analysis in A.M. Best Ratings"; "Risk Management and the Rating Process for Insurance Companies"; "Rating Members of Insurance Groups"; and "Understanding Universal BCAR". Best's Credit Rating Methodology can be found at www.ambest.com/ ratings/methodology.

More information:

http://www.ambest.com.

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