FITCH Affirms EUROINS Romania at IFS 'BB-'; Outlook Stable

FITCH Ratings has affirmed EUROINS Romania Asigurare Reasigurare SA's (EUROINS Romania) Insurer Financial Strength (IFS) rating at 'BB-', and EUROHOLD Bulgaria AD's (EUROHOLD, the group's ultimate holding company) Long-Term Issuer Default Rating (IDR) at 'B'. The Outlooks are Stable.

FITCH has also affirmed the ratings of EUROHOLD's EUR 200 million medium term note (EMTN) programme, and EUR 70 million senior notes issued under the programme at 'B'/'RR4'.

The agency has simultaneously assigned Insurance Company EUROINS AD (EUROINS Bulgaria) an IFS rating of 'BB-'. The Outlook is Stable.

FITCH considers EUROINS Romania and EUROINS Bulgaria as 'Core' subsidiaries of EUROHOLD given their alignment with the group's strategic objectives, material size relative to the organisation and shared group branding.

The following was released by FITCH Ratings:

KEY RATING DRIVERS

The affirmation reflects FITCH's assessment of EUROHOLD's improved but weak leverage, capitalisation and debt servicing capabilities, as well as moderately weak financial performance.

EUROHOLD's consolidated FITCH- calculated financial leverage ratio (FLR) improved to 63% at end-2017 from 84% at end-2016 due to equity increases and debt reduction in 2017. FITCH expects the group's FLR will stabilise below 65%. We excluded goodwill created through internal restructurings from the FLR calculation.

EUROHOLD's consolidated capitalisation as measured by our Prism Factor Based Capital Model (Prism FBM) was 'Weak' at end-2017. EUROHOLD is not subject to Solvency II (S2) regulations.

The S2 ratio of EUROHOLD's insurance activities grouped under the interim holding company EUROINS Insurance Group (EIG) improved to 177% at end-2017 (2016:123%) due to fresh equity injections, investment portfolio de-risking, and lower catastrophe risk retention. EIG benefits from significant double leverage (i.e. borrowed capital at the holding level downstreamed to EIG as equity). S2 capitalisation of the main operating subsidiaries, EUROINS Bulgaria and EUROINS Romania, also improved but was at a weaker level compared with the consolidated S2 ratio.

EUROHOLD's fixed charge cover (FCC) ratio, excluding realised and unrealised gains, improved to 2.1x at end-2017 from 0.9x at end-2016, supported by improved profitability. FITCH expects that debt reduction in 4Q17, and more favourable rates on newly issued Euro medium-term notes (EMTN) could lead to further improvement in EUROHOLD's FCC ratio in 2018.

In FITCH's view, the group's relatively small size in an international context and limited capital markets track record somewhat limits its financial flexibility and narrows the scope of potential lenders/investors.

EUROHOLD's net profit more than doubled in 2017 (net income return on equity: 15%) due to stronger insurance earnings in Romania that were partly offset by higher financing (interest) expenses of the parent company. EIG strongly outperformed the Romanian motor third-party liability (MTPL) market in 2017, supported by its local expertise to underwrite risk in a selective and profitable manner, as well as cost controls. EIG reported a Romanian MTPL combined ratio of 87%, which compares favourably with that of the broader market (100%).

EUROHOLD holds both insurance and non-insurance related assets. EUROHOLD's insurance operations are grouped under the interim holding company EIG, which in turn owns local insurance operating subsidiaries in multiple countries. Non-insurance activities are grouped under Auto-Union (car sales), Eurolease Group (car leasing) and Euro-Finance (asset management & brokerage).

FITCH considers EUROHOLD's business profile as good. EIG holds strong market positions in its core Romanian and Bulgarian non-life insurance markets, especially in the MTPL segment. These strengths are offset by the group's small size and limited business diversification as reflected by high concentration on motor insurance, which accounted for more than 80% of EIG's gross premiums in 2017.

FITCH applied a tailored recovery analysis for the group, which resulted in a bespoke Recovery Rating to replace the baseline recovery assumption for the issuer's debt obligations. The recovery analysis, based on a going concern approach, resulted in a Recovery Rating of 'RR4' for senior unsecured debt issued under EUROHOLD's EMTN programme. As a result the ratings of EUROHOLD's EMTN debt programme, and EUR70 million senior notes issued under the programme, are aligned with the group's IDR.

There is no assurance that notes issued under the programme will be assigned a rating, or that the rating assigned to a specific issue under the programme will have the same rating as the rating assigned to the programme.

RATING SENSITIVITIES

The ratings could be upgraded if the FLR improves to below 55% and the FCC ratio remains above 1.5x for a sustained period.

The ratings could also be upgraded if our assessment of consolidated capital strength, as measured by Prism FBM, improves to 'Somewhat Weak'.

The ratings could be downgraded if EUROHOLD makes a loss on a net income basis, or if its FCC ratio falls below zero.

The ratings could also be downgraded if one of the S2 ratios at the group's main insurance operating subsidiaries falls below 100%, or if the FLR rises above 70%.

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