Fitch Affirms Belarus Re at 'B-'; Outlook Stable

December 20, 2016 - Cbonds


Fitch Ratings has affirmed Belarusian National Reinsurance Organisation's (Belarus Re) Insurer Financial Strength (IFS) Rating at 'B-'. The Outlook is Stable.

The rating and Outlook mirror Belarus's 'B-'/Stable Long-Term Local Currency Issuer Default Rating (IDR) and reflect the reinsurer'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 significant amount of reinsured domestic surety risks.

The Belarusian state has given Belarus Re an exclusive position as the national monopoly reinsurer. The aim is to promote the use of national reinsurance and raise the capacity of the local insurance sector. Although no formal support agreement exists between the state and the company, there is a history of state support through significant capital injections at the latter's 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 must be offered to Belarus Re first, and the reinsurer has the right to reject the cessions. In practice Belarus Re often influences primary underwriting of large risks. Belarus Re's monopoly was introduced gradually with its share in compulsory cessions reaching 100% in 2014.

Fitch views the credit quality of Belarus Re's investment portfolio as low. This reflects the credit quality of locally available investment instruments, constrained by sovereign risks, and the presence of significant concentrations by issuer. As with all state-owned companies, Belarus Re's investments are restricted to deposits and securities of only state-owned banks and enterprises.

In 2015 Belarus Re's IFRS shareholders' funds fell 30% to BYN126m, due to changes in accounting treatment of government bonds. Due to concerns around the liquidity of the government bond market they were reclassified as a held-to-maturity portfolio rather than being marked to market, with an associated loss of BYN55m. The reinsurer's regulatory solvency margin was not impacted due to its local GAAP basis and remained robust with a solvency I-like statutory ratio of 20x at end-9M16.

Insurance of domestic financial risks is the largest line in Belarus Re's portfolio, accounting for 47% of net written premiums in 2015. This includes various kinds of credit default insurance for loans and bonds issued by Belarusian banks as well as reinsurance of export credit risks. This line of business has been a major contributor to the reinsurer's net technical result.

Belarus Re demonstrated volatile operating results between 2009 and 2015, due to the net monetary loss resulting from hyperinflation over 2011-2014. Since 2015 Belarus has ceased to be treated as a hyperinflationary economy. In 2015 the company reported an exceptionally strong net profit of BYN16m, underpinned by an improved underwriting result of BYN11m and by one-off FX gains on investments of BYN15m, due to a devaluation of the Belarus rouble. Based on local GAAP Belarus Re's net income at 9M16 was BYN6m, with investment income of BYN5m and FX gains of BYN11m offsetting a negative underwriting result of BYN8m. The Fitch-calculated combined ratio was 132% at end-9M16, due to a strengthening of the claims case reserve established for property insurance.

Belarus Re has demonstrated strong underwriting results over 2011-2015, with a five-year average loss ratio of 45%. Favourable claims experience and conservative pricing in most lines of business have been the key factors behind these strong results. The obligatory inward cessions and high bargaining power underpinned by legislation have helped Belarus Re to generate underwriting profit.

A change in Fitch's view of the financial condition of the Republic of Belarus would likely have a direct impact on Belarus Re's rating.

A significant change to the reinsurer's relations with the government would also likely have a direct impact on the rating.
Issuer: Belarus Re
Outstanding issues:
Issuer rating:
S&P Global RatingsB-/StableForeign Currency LT11/11/2013
S&P Global RatingsB-/StableLocal Currency LT11/11/2013
Fitch RatingsB-/StableLT Int. Scale (foreign curr.)12/19/2016