Fitch Affirms Belgosstrakh at 'B-'; Outlook Stable
KEY RATING DRIVERS
The rating reflects Belgosstrakh's 100% state ownership and presence of state guarantees for insurance liabilities under compulsory lines, the insurer's leading market position, its sustainable profit generation, and its fairly strong capital position. The rating also takes into account the insurer's potential exposure to the reserving risk on employers' liability insurance and the fairly low quality of its investment portfolio.
Belgosstrakh continues to demonstrate profitable operating performance, with a net profit of BYR482bn in 8M15 (2014: BYR191bn) with investment return and FX gains on investments being the key contributor. The underwriting result was negative, with a combined ratio of 100.8% (2014: 88.6%). The deterioration of the combined ratio in 8M15 was mainly driven by FX losses on FX-denominated reserves.
The insurer continues to maintain a very strong nominal level of capital relative to its current business volumes, with a Solvency I-like statutory ratio of 14x at end-6M15. However, Fitch does not consider that Belgosstrakh's economic capital adequacy is as strong as the statutory solvency ratio implies since the regulator's formula does not take asset risk into account. Risks on the asset side of Belgosstrakh's balance sheet are highly concentrated and directly linked with the sovereign's credit profile.
Belgosstrakh is the exclusive provider of a number of compulsory lines, including state-guaranteed employers' liability, homeowners' property, agricultural insurance and a number of other minor lines. The Belarusian state has established strong support for Belgosstrakh in the legal framework, including direct guarantees on policyholder obligations and significant capital injections in previous years.
Fitch also believes that the insurer may be exposed to reserving risk on the employers' liability line due a non-standard reserving methodology and the line's long tail. To a significant extent this risk is offset by the availability of a direct government guarantee on these policies. Belgosstrakh expects that this guarantee could be removed only upon the transfer of these obligations to a governmental social security agency. This option is currently not under consideration.
Belgosstrakh is currently the market leader in all compulsory lines and a number of voluntary lines, including commercial property and casualty, and travel insurance. Together with its life subsidiary Stravita, Belgosstrakh wrote 53% of sector premiums in 2014 (2013: 51%). The insurer's strong market position is, to some extent, underpinned by the preferential treatment provided in the legislation governing state-owned insurers.
In Fitch's view, Belgosstrakh's investment portfolio is of fairly low quality. This reflects the credit quality of local investment instruments, constrained by sovereign risks, and the presence of significant issuer concentration. However, Belgosstrakh's ability to achieve better diversification is limited by the narrow local investment market and strict regulation of the insurer's investment policy.
Changes in Fitch's view of the financial condition of the Republic of Belarus or any significant change in Belgosstrakh's relationship with the government would likely have a direct impact on the insurer's ratings.