The ratings action on Insurance Company Euroins and Insurance Company EIG Re reflects the insurance group's weak capitalisation and reserve adequacy, the ratings agency said in a statement on Friday.
Earlier this week, Eurohold Bulgaria posted an increase in nine-month revenue from insurance operations under subsidiary EIG to 1.02 billion levs ($566,044/521,517euro) according to new IFRS 17 reporting standards, significantly higher than 656.7 million levs a year ago.
Weak Capitalisation: We forecast Euroins's capitalisation to remain weak at end-2023. The Prism Factor-Based Model (Prism FBM) score was at the high end of the 'Somewhat Weak' category at end-2022 and at end-2021. The group's Solvency II (S2) ratio was 132% at end-2022 (end-2021: 137%) and we expect the S2 ratio to be at least 125% at end-2023.
However, our assessment of capitalisation remains constrained by uncertainty around reserve adequacy after the group's capital position was heavily hit by claims reserve restatements in recent years. Stable reserve development would be key to an improvement of capital while further restatements of claims reserves could result in the Prism FBM score falling below the 'Somewhat Weak' category, potentially triggering negative rating actions.
Weak but Improving Reserve Adequacy: We regard reserve adequacy as weak because Euroins reported significant restatements in its consolidated accounts due to reserve deficiencies in recent years. Based on Solvency II reporting, IFRS-accounted technical reserves were 122% of the Solvency II best estimate reserves (including the risk margin). However, Euroins has yet to establish a longer record of smaller reserve deficiencies to demonstrate the robustness of its claims reserve. We expect reserve adequacy and reserve developments to improve.
Good Company Profile: We regard Euroins's business profile as 'Moderate', reflecting Euroins Bulgaria's market leading position in Bulgaria but also Euroins's small operating scale by international comparison.
Somewhat Weak Financial Performance: Our view on financial performance reflects the high volatility in Euroins's net income. In 2022, Euroins reported a loss of BGN194 million, versus net income of BGN79 million in 2021. Excluding discontinued operations, the result was fairly stable in 2022 at a minor loss of BGN5 million (2021: loss of BGN4 million). We believe the Bulgarian operations have yet to realise their full earnings capacity. We expect a notable amount of the losses from discontinued operations to be recovered in 2023. We forecast that the group's underlying profitability will drive net income from 2024 onwards.
Discontinued Business Hit 2022 Result: Euroins accounted its Romanian subsidiary as a discontinued business in its 2022 reporting after the Romanian regulator withdrew the license. Euroins had decided to fully write off the Romanian operations at end-2022, with a negative impact on income of BGN180 million. We expect Euroins's 2023 result to be unaffected by the unwinding of the Romanian subsidiary because the subsidiary is under full control of the Romanian Guarantee Fund.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Continued stabilisation of reserve experience while the Prism FBM score is at least at the upper end of the 'Somewhat Weak' category
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Prism FBM Score falling below the 'Somewhat Weak' category for a sustained period
- Large losses from reserve development or similar restatements of insurance reserves
- A weakening of Euroins's company profile following its exit from Romania
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 and EIG Re have an ESG Relevance Score of '4' for Financial Transparency due to a qualified audit opinion, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors."
