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

KEY RATING DRIVERS
The rating reflects Belarus Re's 100% state ownership, the reinsurer's exclusive position in the local reinsurance sector underpinned by legislation, and fairly strong underwriting profitability. The rating also takes into account the fairly low quality of the reinsurer's investment portfolio and significant amount of reinsured domestic surety risks.

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.

Fitch assesses Belarus Re's risk-adjusted capital adequacy as reasonable for the rating. The insurer maintains an exceptionally strong nominal level of capital relative to its current business volumes, with the Solvency I-like statutory ratio at 40x at end-9M15. However, Fitch does not consider that Belarus Re'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 the reinsurer's balance sheet are highly concentrated and directly linked to the sovereign credit profile.

Belarus Re has demonstrated strong underwriting results, with the combined ratio averaging 67% in 2010-2014. Favourable claims experience and conservative pricing in most lines of business have been the key factors behind its strong results. The obligatory inwards cessions and fairly strong bargaining power underpinned by the legislation have helped Belarus Re to generate underwriting profit.

Belarus Re's technical reserves remain under pressure from the depreciation of the Belarusian rouble. The FX-driven increase in the unearned premium reserve and loss reserves is expected to have significant negative pressure on the underwriting result in 2015. On the other hand, it should be offset by FX gains on the investment side.

Belarus continues to be treated as a hyperinflationary domicile under IFRS reporting. Belarus Re's hyperinflation loss on the net monetary position reached BYR211bn in 2014, almost fully offsetting the reinsurer's operating profit of BYR218bn in the same year. As the country's peak inflation rate of 108.7% in 2011 will drop out from the three-year corridor for the purpose of IFRS reporting, Belarus Re expects to demonstrate stronger net income in 2015.

Belarus Re makes intensive use of retrocession with an average of 52% of premiums ceded in 2010-2014. Most cessions are made to strong international reinsurers, although select single large risks may be ceded to insurers in developing countries if the risks involve the economic interests of those countries. The effectiveness of Belarus Re's retrocession programme has not been tested since at least 2009, due to favourable claims experience.

At the sector level, Fitch believes Belarusian insurers have significant exposure to financial risks insurance, which transfers credit risks from the banking sector and bond investors. As there is no reinsurance of high credit quality available for this kind of risk, Belarusian insurers tend to spread these risks within the country. Belarus Re is also exposed to these risks (15% of gross written premiums (GWP) in 9M15 and the highest exposure per borrower under this line peaked at 33% of the reinsurer's equity at end-9M15, based on national accounting standards.

In Fitch's view, Belarus Re'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, Belarus Re's ability to achieve better diversification is limited by the narrow local investment market and strict regulation of the insurer's investment policy.

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