March 28 (SeeNews) - Fitch Ratings said on Tuesday it downgraded to CC from B+ the insurer financial strength (IFS) ratings of the Romanian unit of Euroins Insurance Group, part of Eurohold Bulgaria [BUL:EUBG], and placed it on Rating Watch Evolving (RWE).
At the same time, the remaining IFS ratings of Euroins Insurance Group (EIG), Insurance Company Euroins and Insurance Company EIG Re (EIG Re) in Bulgaria were all placed on Rating Watch Negative (RWN), Fitch Ratings said in a statement.
The rating action comes after earlier in March the Romanian financial regulator ASF withdrew the operating licence of Euroins Romania, appointed an interim administrator and decided to file a court request for the launch of bankruptcy proceedings.
Fitch also said in Tuesday's statement:
"KEY RATING DRIVERS
License Suspension, Potential Bankruptcy Trigger: The ASF's decision to withdraw Euroins Romania's license and its intension to call for its bankruptcy reflects the regulator's opinion that Euroins Romania's Solvency II (S2) capital funds would fall RON2.17 billion (about EUR441 million) below the S2 capital requirement and RON1.75 billion (about EUR355 million) below the minimum capital requirement. These actions have materially raised the probability that Euroins Romania could default on its obligations, in our view.
Reinsurance Contract in Doubt: The gap in capitalisation is primarily driven by the ASF de-recognising an intra-group reinsurance contract between Euroins Romania and EIG Re. We assume that EIG Re will continue to pay claims under the affected reinsurance contract. However, under the reinsurance terms, EIG Re has the right to withdraw from the contract without having any obligation for payments if Euroins Romania's license is withdrawn. The majority of Euroins Romania's business is motor third-party liability, a large portion of which is reinsured due to its long-tailed nature.
Reduced Strategic Importance to EIG: The ASF has appointed the Insured Guaranteed Fund (Fondului de Garantare a Asiguraților) as the interim administrator of Euroins Romania. This means that Euroins Romania is no longer under control of its owner EIG. Consequently, we have revised Euroins Romania's strategic importance to EIG down to 'Limited Importance' from 'Core'. This means Euroins Romania's rating is de-linked from that of EIG RE and Euroins Bulgaria.
Limited Direct Impact on EIG: Euroins Romania contributes the majority share of premiums to the consolidated insurance group's premium income. As such, EIG's consolidated business profile will deteriorate from the suspension of new business at Euroins Romania, in our view. At the same time, Euroins Romania's weak reserve adequacy and capitalisation constrained EIG's credit profile. We expect the overall impact on EIG's credit profile to be limited, although heightened reputational risk might result in further credit weakness. This could also lead to a deterioration of EIG's overall credit profile, as underlined by the RWN on EIG's 'Core' entities, Euroins Bulgaria and EIG Re.
ASF Decision Contested: EIG's owner, Eurohold Bulgaria AD (B/Stable), has announced that it intends to appeal the ASF decision at court because it regards the reinsurance contract in question as valid. Independent actuarial investigations by EIOPA and EIG's minority shareholder, European Bank for Reconstruction and Development (AAA/Stable), about the validity of the reinsurance contract have already been launched and the investigations are expected to conclude by end-March.
RWE on Euroins Romania: The RWE is driven by the substantial uncertainties around the fate of Euroins Romania and its relative probabilities. While a bankruptcy could occur, other scenarios that we cannot rule out are a license reinstatement or an orderly run-off.
RWN on Bulgarian Entities: The RWN on EIG's Bulgarian entities relate to the potential for further adverse consequences from the actions of the Romanian regulator, specifically reputational damage or indications of deteriorated corporate governance within the EIG group.
RATING SENSITIVITIES
Euroins Romania
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-- Bankruptcy proceedings triggered at Euroins Romania
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-- Euroins Romania's license withdrawal is revoked.
Euroins Bulgaria and EIG Re
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The RWN could be resolved by downgrading the ratings in one of the following events:
---Corporate governance failings or risks materialise at EIG, or
---EIG's premium income (excluding Euroins Romania) declines by 10% or more, which in our view could reflect the realisation of reputational risk for the overall group
-- Over two years, the following could also lead to a downgrade:
--- Prism Factor-Based Model (FBM) score falling below the 'Somewhat Weak' category,
--- Large losses from reserve development or similar restatements of insurance reserves, or
--- A downgrade of Eurohold's IDR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--The RWN would be removed and the ratings affirmed if Euroins Romania's license withdrawal and placement under administration is revoked, thereby signaling a normalisation of group activities.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Euroins Bulgaria has an ESG Relevance Score of '4' for Financial Transparency due to the qualified audit opinion in its consolidated accounts for 2021, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
The RWN on the ratings of EIG group is partially driven by the possibility that the regulatory actions in Romania reveal new corporate governance failings or risks within the EIG group."
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