July 31 (SeeNews) - Ratings agency Standard & Poor's said it has affirmed the its 'A' long-term insurer financial strength and issuer credit ratings on reinsurer Pozavarovalnica Sava and insurer Zavarovalnica Sava, the core subsidiaries of Slovenia's Sava Insurance Group (Sava).
The outlook on both entities is stable, in line with S&P's expectations that the group will continue to pursue profit growth and to diversify its premiums and income streams, while keeping a strong capitalisation and stable earnings in the next two years, the ratings agency said in a statement on Tuesday.
"We consider a positive rating action remote at this time. An upgrade would require improvement of the group's competitive position, which could occur, for example, if sustainable economic growth propels Slovenia's income in GDP per capita terms further toward the eurozone average and strengthens prospects for profitable domestic growth, which we do not foresee over the next 12-24 months," the statement added.
Here is what else the S&P said:
"We could lower the ratings if Sava's competitive position were to weaken as a result of significant erosion of volumes or profitability triggered by external economic conditions that would also derail sound macroeconomic development in Slovenia.
The ratings are supported by our view of Sava's No. 2 position in the attractive Slovenian insurance market, with a significant expansion into insurance markets of the Adria region, and further diversification of income from its stable and soundly profitable international reinsurance business. Stable and attractive margins underline a better operating performance than most of its international peers, and the company has a solid risk profile. We believe that the group's capitalization is robust--above the 'AAA' range according to our risk-based capital model--and we expect it to remain at least in the 'AA' range, even with further domestic and international business expansion.
We expect that the group will maintain its competitive position in its domestic market of Slovenia, where it currently generates about 70% of premiums and about 70% of profits. In addition, we expect that its international reinsurance business will continue to contribute to diversification of its premiums and income streams. In our view, the group has good distribution capabilities, as well as good brand recognition in Slovenia and in a number of foreign markets in the Adria region. In its international reinsurance business, the company is leveraging its established and proven expertise as a service-driven coverage provider, through which it built strong and stable relationships with its cedents. We see positively that at the end of 2018, the group solidified its domestic competitive position with the acquisition of the fourth-largest asset-management firm in Slovenia. However, we consider that due to the comparably smaller size of the asset under management, income contribution from this business line will remain limited in 2019-2021.
In the past few years, the group materially solidified the underwriting performance of its Slovenian business, while its reinsurance operations remained stable with performance better than the overall market. This lead to improvement of its overall combined ratio to 93.7% in 2018 with a five-year average combined ratio of around 95%, according to our calculation. Stronger underwriting results allowed the group to post continued growth of net income, which in 2018 reached €43 million and translated into a return on equity of 13.1%. We expect that profitability of the property and casualty segment will remain stable, with the combined ratio staying firmly below 95% in 2019-2021. Stable profitable performance, which in combination with its very strong capital position in our opinion, remains the group's key strength. This said, the company may use some of the currently extremely strong capital for business expansion, however, we expect that the group will maintain capitalization at least in the 'AA' range of our insurance capital model over the next two to three years. This is backed by our assumption of net income of at least €40 million and a publicly communicated dividend policy.
Sava's risk profile is very solid, benefiting from its conservative investment portfolio with high-quality investments broadly diversified across the eurozone, while Sava continues to limit the risk of catastrophes on its balance sheet. Exposure to Slovenian country risk is relatively low, making up only 16% of its investments at the end of first-quarter 2019. In our view, continued sound macroeconomic development in Slovenia strengthened creditworthiness of Slovenian assets and is solidifying the group's very conservative investment risk profile.
We continue to regard Sava as a government-related entity, chiefly because the Slovenian government is its largest shareholder. Moreover, Sava plays a key role in protecting Slovenians in a structured way from the impact of catastrophe events, to which the country is exposed. We consider that there is a moderately high likelihood that the government of Slovenia (AA-/Stable/A-1+) would provide timely and sufficient extraordinary support to Sava in the event of financial distress. Although we do not include any uplift for support in the ratings, a change in shareholding would have a negative impact on the ratings if Sava were to be taken over by a financially weaker group."
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