OREANDA-NEWS. Fitch Ratings has affirmed Belarusian Republican Unitary Insurance Company's (Belgosstrakh) Insurer Financial Strength (IFS) rating at 'B-'. The Outlook is Stable.

KEY RATING DRIVERS
The rating continues to reflect Belgosstrakh's 100% state ownership. 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.

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 51% of sector premiums in 2013 (2012: 52%). The insurer's strong market positions are to some extent underpinned by the preferential treatment provided in the legislation governing state-owned insurers.

Fitch's assessment of Belgosstrakh's risk-adjusted capital adequacy concludes that the company is adequately capitalised for its rating. The insurer nominally maintains a very strong level of capital relative to its current business volumes with a Solvency I-like statutory ratio of 14x at end-2013. 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 to the sovereign's credit profile.

Belgosstrakh has demonstrated profitable operating performance in the past five years with net profit of BYR198bn in 2013 (2012: BYR130bn) with the investment return being the key contributor. To assess Belgosstrakh's underwriting profitability Fitch breaks the insurer's portfolio into two parts: regular non-life business and two government-guaranteed lines with a specific reserving methodology.

The regular non-life business accounted for 54% of gross premiums written in 2013 and included both compulsory and voluntary lines of business. This part of Belgosstrakh's portfolio has had moderately negative underwriting results in recent years. The regular non-life business demonstrated a notable improvement of the loss ratio to 58% in 2013 from 65% in 2012, while expenses were stable. Fitch believes that some part of this improvement can be attributed the Belarusian accounting reform in 2013 and the shift to the accrual method from the cash method. This effect will not be present in 2014so it should then be possible to assess the sustainability of improvement in the underwriting profitability.

The second part of the portfolio includes employers' liability and agricultural insurance (38% and 8% of gross written premiums, respectively, in 2013), where Belgosstrakh's functions are more of an administrative nature, although legally the insurer carries the policyholder obligations. The underwriting result of these two lines is always equal to zero as the technical result of the year is fully transferred to the special reserve.

Fitch believes the employers' liability line may be exposed to reserving risk due a non-standard reserving methodology and the line's long tail. To a significant extent these concerns are 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.

Insurance tariffs for compulsory lines are set by the state. Belgosstrakh has limited control over the underlying profitability of related insurance lines, which together accounted for 69% of gross written premiums in 2013, including 46% represented by employers' liability and agricultural insurance. However, Fitch understands that Belgosstrakh plays a key role in advising the government on the determination of insurance tariffs and in the development of insurance legislation, particularly in the field of compulsory insurance.

In Fitch's view, Belgosstrakh's investment portfolio is of relatively low quality. This reflects the credit quality of local investment instruments, constrained by sovereign risks, and the presence of significant concentrations by issuer. Belgosstrakh's ability to achieve better diversification is limited by the narrowness of the local investment market and strict regulation of the insurer's investment policy.

RATING SENSITIVITIES
Any change in Fitch's view of the financial condition of the Republic of Belarus or any significant change in the Belgosstrakh's relationship with the government would be likely to have a direct impact on the insurer's ratings.