September 7 (SeeNews) - Standard & Poor's Global Ratings has affirmed the “A” insurer financial strength rating of Slovenia-based multi-line insurance group Sava Re's core entities Pozavarovalnica Sava d.d. and Zavarovalnica Sava, with a stable outlook, it said.
"We believe that Sava's robust balance sheet, solidified domestic position with improved scale and diversification, and continued solid risk controls will safeguard continued stable business development domestically and internationally", S&P said in a credit rating report published on the website of Sava Re on Tuesday.
The ratings agency said that it expects Sava's acquisitions and operational adjustments made in the past two years, as well as continued good overall underwriting controls, to help the group retain good top- and bottom-line performance during motor lines claim frequency normalisation and impact of higher overall inflation on claims and costs.
S&P also said:
"We believe the group will continue to use its solid credentials to tap profitable growth opportunities in domestic and international insurance and reinsurance markets. Overall, we expect premiums growth will remain solid in 2022 at around 5%-7%, and then to gradually moderate toward longer-term growth of 3%-5% over 2023-2024. Capitalization remains one of Sava's key rating strengths. The group maintains buffers above the 'AAA' level in our capital model. Sava's robust capitalization and its strong and stable earnings enable it to maintain capital at sound levels. Due to the conservative asset structure, and favorable capital structure mainly composed from shareholder equity, we do not consider that recent capital market volatility had a significant impact on Sava's capital position.
We assume that the company could use some of its capital buffers to overcome moderate deterioration in economic and capital markets conditions or for faster business expansion if opportunities would appear. However, we expect the group will maintain capitalization at least in the 'AA' range of our insurance capital model over the next two to three years.
Sava's full year 2021 and mid-year 2022 performance remained resilient, and compares well with that of its Europe, Middle East, and Africa (EMEA) peer group. The group's 2021 net income further strengthened via its consolidation of NLB Vita and through ongoing business profitability, while also observing some frequency benefit from lockdowns in 2021. Overall, the group reported a strong return on equity (ROE) of 15.8% in 2021. We expect the frequency benefit to disappear in 2022, leading to normalization of group performance. This said, we expect the group's performance to remain solid thanks to the robust performance of Slovenian primary insurance operations. Sava benefits from a strong household position in Slovenia enabling timely price adjustments through which to retain overall solid underwriting performance. With a mid-year 2022 combined (profit and loss) ratio of 92.3% and net income of €28.9 million, the group is well positioned to reach its 2022 performance targets of above €60 million. For 2023-2024, we expect resilient performance, backed by sound underwriting results, with a combined ratio at or below 94% and net income of €53 million-€65 million.
Sava is the second-largest multiline insurance group in Slovenia with a market share of about 20% and is also the fourth-largest asset manager. It also has international reinsurance operations, mainly focused on Asia and EMEA, and some primary insurance operations in the Adriac region (the area of former Yugoslavia). Sava has a proven track record of profitable business growth, with an average five-year combined ratio of 93.4%, which enables the group to continue generating strong earnings. That said, compared with higher-rated peers', Sava's premiums and net income are more reliant on the domestic market's development.
In our view, the insurance sector in Slovenia in 2021 performed well and underwriting performance improved, which allowed further profit growth. We believe that Slovenia's life and property/casualty (P/C) sectors will continue to benefit from strong and sustainable performance, on account of disciplined underwriting with good underwriting controls. In our view, Sava's strong domestic market position, through its entity Zavarovalnica Sava d.d. (financial strength rating: A/Stable/--), continues to enable to source attractive underwriting performance in both the P/C and life segments. In 2021 a large proportion of group earnings (€58.1 million) originated from these operations, which, in our view, will remain the group's key strength. The direct insurance business in the Adria region--Sava--is well represented in smaller, less developed regional markets including North Macedonia, Montenegro, and Kosovo. It offers the group long-term growth opportunities and is striving to enhance its small position in larger markets like Croatia and Serbia.
In the international reinsurance business, Sava is leveraging its established and proven expertise as a service-driven coverage provider, through which it has built strong and stable relationships with its cedents. In 2021, the international reinsurance operating performance improved with the combined ratio improving to 95% after COVID-19 related losses in 2020. We note that the 2021 underwriting result was protected by robust reinsurance protection which limited the impact from natural catastrophe losses from the 2021 summer floods in Central Europe. We expect that Sava's reinsurance operations in 2022-2024 will continue to grow, further solidifying its geographic footprint in EMEA while retaining solid position in Asian markets. Overall, we believe that the group's reinsurance operations are able to source good and stable earnings with which reinsurance operations will remain an additional business diversifier for the group.
The group's primary insurance operations remained resilient in 2021, outperforming peers, thanks to Sava's larger proportion of business in motor lines, which experienced lower frequencies during COVID-19-related lockdown measures. We note that the group in 2021 still observed positive top- and bottom-line developments from its first-time consolidation of life insurance operations of NLB Vita. Overall, the group's combined ratio further improved and reached a historical low at 89.4% at year-end 2021, while in the first half of 2022 it remained solid at 92.3%. We expect that in the remainder of 2022 and in 2023-2024, the group's underwriting performance will see limited impact from normalization of claims frequencies, higher inflation, and increasing wage and other costs. This said, we believe that performance in the next few years will remain at comparably solid levels, with the combined ratio expected to remain solid at around its five-year average. We note that the group already started to adjust pricing toward the end of the first half of 2022 to reflect higher inflation. This in our view will help the group retain resilient underwriting performance. We also expect that the underwriting and investment risk appetites will remain stable. We note that increased scale and tight cost controls in 2021 and the first half of 2022 allowed Sava to progress with several strategic investments in digitalization and modernization of operations. We believe that the group is willing and able to maintain claims and costs under control which will support the group's future operating performance. In our view, Sava will also continue to use its robust balance sheet for further profitable growth, especially in the primary insurance markets, international reinsurance businesses, and asset management. Furthermore, rising interest rates will gradually offer some improvement of investment results. Overall, we expect continued comparably strong and stable performance in 2022-2024, with an ROE of about 9%-13%.
Sava's robust growth momentum continued in 2021 and the first half of 2022, with the group reporting 7.4% and 4.5% growth of gross written premiums to €730 million in 2021 and €433 million in the first half of 2022. Growth in 2021 was notably supported by the first-time consolidation of NLB Vita, although Sava also continued to see some organic premium growth in its own primary and reinsurance operations, driven mainly by rates hardening. Price increases continued in the first half of 2022 with increase in that period coming from price adjustments in its primary operations and growth in new risks, while also reinsurance operations displaying growth. Overall, we expect that premiums growth will remain solid in 2022 at around 5%-7%, and then gradually moderate toward longer-term growth of 3%-5% over 2023-2024, driven by moderating economic development and expected lower inflation, as well as stabilization of claims frequencies. We expect that Sava will continue to leverage its sound balance sheet for any profitable business opportunities that may arise.
Sava's financial profile underpins its strong and resilient balance sheet againwith a robust capital position based on our capital model and Solvency II. We believe that the group's sound operating performance will support moderate dividend payments and growth financing. In our view, underwriting and investment risks and funding structure support the very strong financial risk profile.
In 2021 Sava's capital position remained above the 'AAA' level according to our risk-based capital model. Our favorable view of the group's capitalization is further supported by Sava's strong Solvency II ratio of 198% at year-end 2021 and 196% on March 31, 2022, based on a standard formula and no use of transitional adjustments. We note that the group distributed moderate dividends in 2022, in accordance with its strategy, and we expect these to continue in the coming years. We believe the solid capital level and conservative asset allocation allowed Sava to weather capital markets volatility in the first half of 2022. We also note that the impact of market volatility on Sava's capital was comparably limited as the group's capital structure mainly depends on hard forms of capital like shareholders' equity, additionally supported by prudent margins on its P/C loss reserves.
Sava's risk profile has remained stable and supportive of its very strong financial profile, benefiting from its conservative investment strategy and reinsurance protection. We believe that the tighter underwriting risk controls that Sava gradually implemented in the past decade, combined with strong reinsurance protection, safeguarded the group against losses outside its risk tolerances, as evidenced by its limited claims from the Central European floods in 2021, COVID-19, or the 2018-2019 typhoons in Asia. We expect that Sava will maintain a good reinsurance protection strategy to continue to safeguard the group's earnings and capital against larger catastrophe claims.
We believe that asset risks remain elevated for the international insurance sector in 2022 and beyond. In our view, even after the consolidation of NLB Vita, Sava's balance sheet remains less sensitive to market volatility than most European peers' at similar rating levels. We note that Sava has comparably limited exposure to traditional guaranteed life insurance business. Therefore, we expect that its life earnings will be less sensitive to interest and capital markets.
We believe the group's robust capital position, good liquidity, and capital structure will help safeguard its funding capacity in case of need. Sava has historically demonstrated access to capital markets, most recently in 2019. The group's leverage at year-end 2021 remained favorable at about 14%, while fixed charge coverage was at about 37x, and we expect that it will remain at solid levels in the following years. We consider that at these levels the group retains adequate financial flexibility to issue further debt, if needed."