1
Rating AgencyExpert Rating Ltd
( e-mail: , tel.: +38 044 227-60-74)
The rating report
(version for publication)
(on basis of the Agreement No.06-1/РA of April 15, 2009)
Insurer’s stability rating,Expert Rating RA scale: / аа–
(high stability level, with a positive forecast)
Nationalscaleequivalent / uaAА–
Interpretation of the rating: / Thereishighprobabilityofthatthecompanywiththe given ratingwilldischargeitsobligationswiththeclients
Rating date: / October 22, 2007
Last rating report publication date: / July 30, 2009
JointStockReinsuranceCompany
LEADER RE
(Full name of the company)
26, Bauman str., Kiev 03190
(Company legal address)
3d floor, Glubochitskaya, 40, Kiev04050,Ukraine
(Company de facto address)
Incorporation date / April 01, 2004Date of startofoperations / August 17, 2004
National enterprises register code / 32830769
Account bank / JSC OTP Bank
Auditor / JSC Union of Auditors of Ukraine
Actuary / The actuaryKovbasenko M. makes part of Company staff
Registrar / JSC Invest-M
Phone / +38(044) 586-42-20
Fax / +38 (044) 586-42-21
E-mail /
Web address /
The IC is licensed for the following types of voluntary insurance:Freight and luggage insurance;Insurance of property against fire risks and act of God risks;Property insurance;Credit insurance;Third party legal liability insurance;Motor vehicle transport insurance;Liability Insurance of motor vehicle owners;Watercraft insurance;Air transport insurance;Liability insurance of aircraft owners;Accident insurance;Financial risks insurance;r/w transport insurance.
The IC is licensed for the following types of obligatory insurance:no one.
The present report is the rating research expressing opinion of Expert Rating RA analysts.
The report is a substantiation of the rating assigned, being also an opinion of Expert Rating RA analysts.
See the last page of the report for use limitations
1. Companydescription.
The closed joint-stock company ‘Reinsurance Company Leader Re’has been incorporated on April 1, 2004. The company started operations actually in August 2004 after getting the necessary licenses. At incorporation,the company has the name ‘PrometeyInsuranceandReinsuranceCompany’.Afterwards the name has been changed for ‘Reinsurance Company Leader Re’. Initially large stock of the Company belonged to one of the largest Ukrainian banks AKB VA BANK. After change of banks’ shareholders,it was decided to unify the branch companies of the bank into one financial group VAB Group. VAB Group became the first financial group in Ukraine, whichofficially consolidated the assets under a single brand. Therefore, on October 9, 2006 the name of the company has been changed for JSCReinsurance Company VAB Re. The company has undergone rebranding procedure. In the end of 2008 the decision was taken to exit the Group VAB, the company shareholders changed and it took its former name Closed Joint-Stock Company ‘Reinsurance Company Leader Re’.
During the 5 years of operations, the business has been concentrated strictly on reinsurance. Leader Re is one of the few specialized reinsurers recognized by the marketin Ukraine. The last years Leader Re develops new programs of reinsurance: nonproportional obligatory reinsurance, that ensures a predictable incoming stream of financial assets, and proportional obligatory reinsurance. The largest and most significant clients are the insurance companies of Ukraine specializing on classical property and personal insurance. Gradually the share of non-resident insurers demanding for diversification of their portfolio placement will increasein the structure of the business.
Leader Re showed good dynamics of development in 2005–2008. The size of gross premiums collected by the company during four years, has grown more than by 3 times in 2008. In2008, gross premiums of the company have practically made up 40 million UAH. It is quite little for the Ukrainian market;however, it should beconsidered that Leader Re operates in such a narrow market segment, as reinsurance(tab. 1).
Table 1
Key performance indicators of LeaderRein 2005–2008 (in thousands UAH)
Показатели / 2008 / 2007 / 2006 / 2005 / Growthrate %2007-2008 / 2005-2008
Assets, th.UAH / 54800.0 / 68073.1 / 59836.0 / 54042.9 / -19.50% / 1.40%
Shareholdersequity, ths.UAH / 43801.0 / 53538.0 / 51727.9 / 50531.7 / -18.19% / -13.32%
Shareholdersequity/Assets, % / 79.93% / 78.65% / 86.45% / 93.50% / 1.63% / -14.51%
Authorized capital, ths.UAH / 50000.0 / 50000.0 / 50000.0 / 50000.0 / - / -
Gross premium, ths.UAH / 39406.0 / 34569.0 / 20514.2 / 12778.9 / 13.99% / 208.37%
Grosspremiums/capital, % / 89.96% / 64.56% / 39.66% / 25.29% / - / -
Reinsurer’sshareingrosspremium, % / 26.06% / 10.16% / 23.34% / 52.62% / - / -
Shareofnon residentreinsurersinthepremiumscededforreinsurance, % / 23.51% / 61.50% / 34.62% / 3.67% / - / -
Lossratio(cash losses for the period), % / 56.26% / 58.03% / 34.02% / 6.45% / - / -
ROE, % / -24.70% / 3.40% / 22.55% / 5.96% / - / -
Netincome (loss), ths.UAH / (9737) / 1809.9 / 1196.2 / 571.5 / - / -
Source: Company data, data from company reports to the Securities and Stock Market State Commission and to the StateCommittee for Regulationof Markets of Financial Services
The negative ROE and the 9.7 millionUAH loss of the company in2008can be regarded as a negative trend. This loss may be partially regarded as a technical one, because due to decreasing stock value the company was getting rid of shareinvestmentsand increasing the monetary funds. The profitability of operations has been recovered in the first quarter of 2009. For the first quarter of 2009 Leader Re has cleaned up 15.4 millionUAH. The agency focuses on thefact that for the last 4 years, except 2008, the company always concluded the fiscal year with profit.
In the long-term period, twoclear tendenciesshould be notedas well: the decreasing share of reinsurers in gross-premiums and the growing loss ratio. Leader Re increased the deductibles, at the same time raising the loss ratio and the indemnities. Loss ratio 56.26% in 2008 is not considered critical for the market of classical reinsurance though it is a little bit high as for the Ukrainian market. Growth of deductibles can be consideredone of the reasons of growing ROE in the past. The changes of company strategy in the field of reinsurance are obvious. If in 2006 only 3.67% from total premiums ceded have been directed to non resident reinsurers, in 2008 this figure was already 24%. Due to that thelarge non-residents reinsurers with ratings of investment level make the majority of Leader Re reinsurance partners, the tendency of their share growth in reinsurance portfolio of Leader Re deserves a positive estimation.
Hereby, when analyzing the last 4 years of operations, the working strategy of the company can be safely qualified as successful one. The reinsurance company ‘Leader Re’ is the universal professional reinsurer in the non-life segment. The company introduces the best standards of reinsurance operations in Ukraine. It has experience of sales of innovative products meeting the requests of insurance companies, operating on the fast-growing competitive market of Ukraine. The company enters with success the international markets;it has positive experience of getting business in emerging and alternative markets according to Lloyd’sclassification. Throughout the last 5 years, the company several times changed the working concept and brands, entered and exited one of the largest financial groups in Ukraine. The only facts remaining invariable were that the company always ensured high level, as for the Ukrainian market, of indemnities payments and adequatereinsurance coverage to its clients.
2. Market share and business activity of the company.
The Company ‘Leader Re’ is the only professional reinsurer in Ukraine. From the very incorporation time,the company chosethe segment of classical non-life insurance types: insurance of property against fire risks and act of God risks; insurance of transport, freights, third party legal liability insurance, and personal insurance. The total amount of reinsurance market in 2008 has made 5.6 billion UAH. However, considering that multiplication of premiums is characteristic for reinsurance market, the Agency evaluates the share of Leader Re in the total market at the rate of less than 1%, but more than 0.5% of the reinsurance market. However, in 2009 after studying circumstances in which the company works, the Agency has decided to revise the key approach to company market share estimation. The matter is that from 5.6 billion UAH of reinsurance premiums only 561 million UAH have been ceded to the Ukrainian companies. That is the amount of 561 million UAH can be safely considered as a ceiling volume of the internal reinsurance market in 2008, and as the company operated mainly in the reinsurance segment, the Agency evaluates its share in the national market at the level of not less than 7 %.
Both primary insurers and specialized reinsurance companiesdo offer reinsurance services. However, considering the unique status of Leader Rеbeing the only professional reinsurer, only direct insurers diversifying their operations at the expense of reinsurancepremiums’attractionmake competitionto the company. The most active players are: Oranta NJSIC, AXA-Insurance, INGO UkraineJSIC,ASKAUJSIC, Providna IC. The Russian reinsurancecompanies Moscow Re, Russian ReinsuranceCompany and Transsib Re are competition to a certain degree. However the competitiveness of Russian companies in 2009 will be weakened due to specificity of implementationof rating requestsby State Commission for Regulation of Financial Services Markets of Ukraine for non-residentreinsurers. Due to specific taxation of non-residents’ reinsurance operations, the above-mentionedcompetitors are situational and,under existing conditions, cannot pretend for an essential share of market. The universality in all that concerns reinsurance, that is all types and forms of reinsuranceoperations, a wide spectrum of reinsurance programs, is a competitive advantage of the company.
The Reinsurance Company Leader Re has no territorially separated divisions. LeaderRe head office only carries out the operations on domestic and international markets. The company uses the following basic sales channels:
1. Direct sales.The company started operations from this main channel. The share of this channel in the structure of inbound business decreases gradually. However, in any case, the share of direct sales during the next 2–3 years will prevail over other channels of sales. The company still focuses on domestic market and all potential customers are located within easy reach of the LeaderRe sales division.
2. Brokerage sales. The company most actively uses the channel when attracting business from international markets, and at the conclusion of contracts for risks exceeding ‘agreed’ limits of liability and for non-standardtypes of business, poorly known to domestic market, for example, insurance against interruption of production, professional liability insurance etc.
3. Sales through pools.It is a perspective direction of LeaderRе operations, new to the Ukrainian market. Company participation in the capacities of internal insurance pools does not only ensure diversification of operations, but also evidencescompany strategy expansion in the external reinsurance markets.
The expenses for sales through the above-mentioned channels increase to the same proportion as gross premiums of the company. Due to reinsurance sales specificity, Leader Re has no problem of excessive (dumping) sales promotion. For instance, 2008 direct sales expenses of Leader Re did not exceed 0.25% from the written premiums.
According to Agency, Leader Re has a well-thought marketing plan entailing a large increase both of sales, and of company business diversification on a global scale. Leader Re believes that forming unique competitive advantages system is an important tool of influence on sales growth:
1. Creation of own reinsurance capacities.
The ceded obligatory capacities available in 2008 and resumed in 2009 allow accepting in reinsurance risks on the main categories of business. Such protection allows the RCLeader Re to maintain a secure portfolio balance, to be competitive in providing protection to cedents, and to minimize risks of profitabilityfluctuations.
2. Construction of flexible and functional statistics base used for quotation and risk assessment and management.
In the first half of 2008 Leader Re has completed introduction of ERP-system which ensured complete implementation of the existing accounting program of the company used for estimation of trends of own development and of the market as a whole. The corporate information system has allowed carrying out analysis per clients, objects, risks, to perform actuarial estimates, and to introduce the analytical unit, which uses at the largest extent the volume, quality and variety of the data accumulated on the basic categories of business. Such system has allowed being more sensible in estimating the cost of reinsurance services.
3. Effective underwriting policy.
The policy basesupon the complex estimation of the risk offered in view of the international principles of reinsurance and the objective realities of the market of Ukraine and its tendencies, the standardization of terms of insurance and cession of risks to reinsurance, on a weighed approach to the reinsurancetariff policy, transparent procedure of settlement of losses.
4. Individual assistance in developing insurance and reinsurance programs.
The aim here is to construct qualitatively new relations with partners on providing reinsurance on the conditions preliminarily agreed and clear for insurance participants.It serves in the issue to improve the quality of the reinsurancecoverage provided by the company.
5. Fast and effective assistance in settling losses.
6. Company transparency and openness of information on company services. The company publishes regularly the results of activity both independently and through rating agency.
Entering the international market should be a key task aiming to increase the volumes of Leader Re business. Unlike the primary cover, the market of reinsurance services is an international one. This follows from that the offer of and demands onreinsurance services do traditionally have international character and are not limited to the territory of separate countries. The Reinsurance Company Leader Re is already actively involved in the international redistribution of risks. The company has concluded the first inbound contract in 2005. In the next years,the company developed not only in quantity, but also qualitatively. The company portfolio includes obligatory programs of inbound business from outside of Ukraine; capacities, shares of participation and business types involved in inbound reinsurance are growing. LeaderRe actively co-operates with the known broker companies attracting business not only from European, but also from Asian and Middle Eastern markets.
LeaderRe takes an active market position, promoting an information exchange between insurers and insurance intermediaries. In addition,LeaderReregularly participates in the international Reinsurance forums in the countries of near and far abroad.
The Agency believes that the following factors shall ensure the future success of LeaderRein the international market:
1. Involving new insurance intermediaries in sales.
2. Effective directwork with large operators of the insurance markets of CIS and Baltic countries, Poland, Bulgaria, Hungary, CzechRepublic, Slovenia etc., that is, markets with small capacity.
3. Generation of alternative competitive offers for the insurers of near and far abroad.
4. Growth of inbound reinsurance from the existing non-residentpartners.
5. Continuation of transparency policy with information disclosure through official and alternative sources.
3. Diversificationofinsuranceactivities
Diversificationbyinsurancetypes.LeaderRe portfolio diversification per insurance typesis at a good level, according to Agency. 63% of premiums collected in 2008 belonged to ‘motor vehicle transport insurance (except r/w)’. In 2006 the share of this insurancetype made 76.52% (tab. 2).
Table 2
DynamicsofLeaderRegrosspremiumsperinsurancetypesin 2006–2009
Types of insurance / 2008 / 2007 / 2006ths. UAH / % / ths. UAH / % / ths. UAH / %
Motor vehicle transport insurance (except r/w) / 25117 / 63.00% / 27436.7 / 78.26% / 15697.3 / 76.52%
Freightandluggageinsurance / 3265 / 8.19% / 2050.7 / 5.85% / 1 115.70 / 5.44%
Fire risk and act of God risks insurance / 5571 / 13.97% / 3443 / 9.82% / 2 431.10 / 11.85%
Other property insurance / 3543 / 8.89% / 1405.6 / 4.01% / 887.6 / 4.33%
Other types of insurance / 2373 / 5.95% / 723.2 / 2.06% / 382.5 / 1.86%
Total: / 39869 / 100.00% / 35059.2 / 100.00% / 20 514.20 / 100.00%
Source:Company data, company report to StateCommittee for RegulationofMarkets of Financial
Services
As a whole, the Agency positively evaluates reduction of company dependence upon motor vehicle insurance. In standard conditions of a primary market suchlevel of concentration could be regarded as satisfactory one, but as LeaderRecollects premiums not from direct insureds, but accepts them for reinsurance, the company is to a lesser degree subject to influence of industry risk. Besides that, the prevalence of motor vehicle transport insurance in the portfolio of Leader Re is explained by natural development trends of the national insurance market (it will be recalled, that we talk about rating substantiation according to the national scale). Throughout the recent years,insurance companies in Ukraine have started to run in actively the segment of retail insurance, having chosen as a driving type exactly the insurance of motor vehicle transport of physical persons. Level of insurance coverage on this type is by an order higher than on other types of property insurance. In the structure of many insurance companies, the given type makes more than a half of all operations, and morethan 80% at some other companies. As LeaderRe is a market company, its structure of premiums in a natural way reflects market tendencies. At the same time, experts of Agency warn the company against further escalating the market share of motor vehicle insurance. According to Agency, in 2009–2010 companies with more than 60% from the collected premiums of portfolio belonging to motor insurance, will experience financial troubles.
Geographical diversification. Considering specificity of reinsurance business, the regional structure of the collected premiums (location of insured objects on which Leader Re provides reinsurancecoverage) is a mere abstract concept. According to reinsurance contract, not the material object with concrete characteristics (location included) is the insured object, but the financial result of such objects’ insurance contract. The non-proportional obligatory reinsurance implies insurance of the primary insurers’whole portfolio(separate objects are not ceded and the reinsurer is not informed on separate objects). Among the partners of the company there are insurers with a developed regional network, present in all regions of Ukraine, and also the large regional insurers actively working in Odessa, Donetsk, Dnepropetrovsk, Kharkov, Zaporozhe and Lvov regions. Considering the given feature of reinsurer business, the Agency when making rating estimation does not take into consideration the level of geographical diversification due to that it is not important for the given type of business. Therefore, the Agency regards this levelas conventionally normal.
Client diversification. Over 100 companies are active partners of the Company. The companies vary both on specialization, and on efficiency of activity: there are very large, large, small and situational reinsurers. Volumes of business ceded in reinsurance depend on many factors, both objective and subjective. Among the partners of Leader Re there are companies with more than 40 % of premiums ceded in reinsurance from the total amount of gross premiums. The share in the total incoming business of the company of insurance companies having common shareholders or end beneficiaries with Leader Re made over 5%in 2006, and in 1 % in 2007. It will be recalled that in 2008, the company exited the structure of financial group VAB, and now the company does not have reinsurance operations with shareholders.