Fitch Affirms Belarus Re at 'B-'; Outlook Stable
KEY RATING DRIVERS
The rating and Outlook mirror Belarus's 'B-'/Stable Local Currency Long-Term Issuer Default Rating (IDR) and reflect the insurer's 100% state ownership. The rating also reflects the reinsurer's exclusive position in the local reinsurance sector underpinned by legislation, and fairly strong underwriting profitability, the fairly low quality of the reinsurer's investment portfolio, and the significant amount of reinsured domestic surety risks.
Belarus redenominated its currency on a scale of 10000:1 on 1 July 2016. This does not have any implications for Belarus Re's rating.
In 2015 Belarus Re's capital fell by 30% to BYN126m (BYR1.3tn) from BYN180m (BYR1.8tn) mainly due to a bond exchange in its investment portfolio. The company exchanged the portfolio of old government bonds for the new issue of government bonds of the same quality. The negative result from disposal of these bonds was BYN12m (BYR115bn). The new issue was classified as held-to-maturity portfolio, with a balance value of BYN21m (BYR211bn) and with a loss from initial recognition of BYN55m (BYR546bn).
Belarus Re's capital position is supportive of its rating level. The reinsurer maintains exceptionally strong nominal levels of capital relative to its business volumes. The reinsurer's regulatory solvency margin was not affected by the bond exchange due to its local GAAP basis and remained robust, with a Solvency I-like statutory ratio of 30x at end-6M16. Based on Fitch's Prism factor-based capital model, the reinsurer is adequately capitalised.
In 2015, based on IFRS, Belarus Re reported strong operating results of BYN15.7m (BYR157bn) (2014: net loss of BYN9.9m (BYR99bn)), with an improved combined ratio of 46% (2014: 77%). Strong underwriting profitability of BYN11m (BYR111bn) (2014: BYN5.4m (BYR54bn)) is mainly due to a claims case release of BYN4.5m (BYR45bn) for the financial risks line, which contributed 21 percentage points to the improved combined ratio in 2015. The strong underwriting result and one-off FX gains on investments of BYN14.9m (BYR149bn) completely offset the negative investment result of BYN1.9m (BYR19bn) in 2015, compared with BYN6.8m (BYR68bn) of investment income in 2014.
In 6M16, based on local GAAP, Belarus Re reported net income of BYN4.8m (BYR48bn) (6M15: BYN6.2m (BYR62bn)). The FX gains on investments of BYN11m (BYR112bn) and modest investment income of BYN3.9m (BYR39bn) completely offset a negative underwriting result of BYN8.0m (BYR80bn). The combined ratio worsened to 157% in 6M16 from 110% in 6M15, driven by a loss ratio of 129% in 6M16 compared with 75% in 6M15. The loss ratio was impacted by a sharp strengthening of the claims case reserve established for property insurance in 1H16.
The Belarusian state has established an exclusive position for Belarus Re as the national monopoly reinsurer. The aim is to promote national reinsurance and raise the capacity of the local insurance sector. Although there is no formal support agreement between the state and the company, the track record of state support is evident through significant capital injections at inception and in recent years.
Regulation obliges local primary insurers to cede risks exceeding the permitted net retention of 20% of their equity. These obligatory cessions as well as any voluntary cessions of risks below the threshold must be offered to Belarus Re first. The reinsurer has the right to reject both types of cessions and in practice is often involved in the primary underwriting of large risks. Belarus Re's monopoly has been introduced gradually, with its share in compulsory cessions growing to 100% in 2014 from 10% in 2006.
The reinsurer's investment portfolio is of relatively low quality, reflecting the credit quality of bank deposits, which is constrained by sovereign risks and the presence of significant concentrations by issuer. The reinsurer's investment profile is attributable to the narrowness of the local investment market and strict regulation of the investment policy.
Any change in Belarus's Local Currency Long-Term IDR is likely to lead to a corresponding change in Belarus Re's IFS rating.