At the same time, the agency has placed the remaining IFS ratings of the Euroins Insurance Group (EIG), Euroins Bulgaria and EIG Re, on Rating Watch Negative (RWN).
The rating actions follow the Romanian insurance regulator ASF's announcement on 17 March that it has withdrawn Euroins Romania's insurance license appointed an interim administrator and that it intends to open bankruptcy proceedings.
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.
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has the right to withdraw from the contract without having any obligation for payments if Euroins Romania's license is withdrawn.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.
The ASF has appointed the Insured Guaranteed Fund (Fondului de Garantare a Asiguratilor) 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.
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.
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.
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