Fitch Ratings, London, 8 February 2010: Fitch Ratings has today downgraded Belarusian Republican Unitary Insurance Company’s (Belgosstrakh) Insurer Financial Strength (IFS) rating to ‘B-’ from ‘B’. The Outlook is Negative.

The rating action reflects the deterioration in the average credit quality of Belgosstrakh’s investment portfolio following a sizeable equity investment in a state-owned bank. It also reflects Fitch’s view that the Republic of Belarus, Belgosstrakh’s 100% owner, would be no more likely to support the company than other state-owned enterprises in the event of need, even though Fitch expects it may have greater ability to do so on account of Belgosstrakh’s relatively smaller size. The Negative Outlook reflects the weakening ability of the Belarusian authorities to support the insurance sector in such a scenario. The rating also takes into account the leading role performed by Belgosstrakh in the development of the Belarusian insurance sector and the company’s adequate capital position.

Belgosstrakh’s rating will continue to be affected by any significant changes in Fitch’s view of the financial condition of the Republic of Belarus.

The average credit quality of Belgosstrakh’s investment portfolio is weak. Fitch notes that 55% of the company’s total investments at Q309 were held in equities of Belagroprombank (rated ‘B-’, Outlook Negative) following a BYR650bn capital injection from the government in December 2008 to acquire this shareholding. Other investments are placed entirely in state-issued bonds, bonds of state-owned banks, or cash in state-owned banks, all of which are rated ‘B-’, Outlook Negative by Fitch. The agency also notes the relatively low liquidity of most of Belgosstrakh’s investments in light of the underdeveloped investment market in Belarus.

Fitch notes Belgosstrakh’s extremely strong coverage of the regulatory solvency ratio and views capital as adequate for the rating level. However, the agency believes the significant concentration of Belgosstrakh’s investments in state-owned enterprises presents a high credit risk that could rapidly reduce capital adequacy in the event of financial instability at the sovereign level.

Belgosstrakh’s underwriting performance is reasonable with a combined ratio of 103.3% in H109 (FY08: 100.1%). Fitch notes that tariffs for compulsory lines of business in Belarus are set by the state, thus limiting Belgosstrakh’s ability to control the profitability of its portfolio. The agency also notes positively that Belgosstrakh is tasked with the provision of practical and methodological support for the evolution of the insurance industry in Belarus, and has significant influence in the determination of insurance tariffs and insurance legislation.

Belgosstrakh was founded in 1921 and had a 58% share of the non-life insurance market in Belarus as at 1 December 2009. The company has two subsidiaries: Stravita, a life insurer, and Poligraf, which carries out polygraphic and publishing activity. At end-H109 Belgosstrakh had BYR777bn in net assets and seven branches covering all Belarusian regional centres, including Minsk.
This rating action reflects the application of Fitch’s current criteria which is available on Fitch’s website at www.fitchratings.com and specifically include: ‘Insurance Rating Methodology’, dated December 29, 2009, and ‘Non-Life Insurance Rating Criteria (Global)’, dated March 2, 2007.