LJUBLJANA (Slovenia), July 22 (SeeNews) – Rating agency Standard&Poor’s said on Tuesday it affirmed its long term credit rating on Slovenian reinsurer Sava Re [LJE:POSR] at 'BBB+' with a stable outlook.
"The stable outlook reflects our view that Sava Re will maintain what we regard as a satisfactory business risk profile and its now moderately strong financial risk profile," Standard&Poor’s said in a statement.
The rating agency also said also said in the statement:
“Although the ratings remain unchanged, we have revised our assessment of capital and earnings to strong from moderately strong because we expect the group's risk-based capital adequacy to improve to very strong from strong.
Under our criteria, this is commensurate with a financial risk profile that is moderately strong, rather than upper adequate. We still view the business risk profile as satisfactory.
We regard Save Re's competitive position in Slovenia and the surrounding region as strong, enhanced by its acquisition of mid-market Slovenian insurer, Maribor. The group now has a 17% market share in Slovenia. We understand, however, that full integration of Maribor to realize synergy effects will take at least three years.
We regard Sava Re's capital and earnings as strong. Capital adequacy was initially under pressure from the cost of the Maribor acquisition, although this was funded by a rights issue. However, we expect capital adequacy across the Sava Re group to improve through to year-end 2016 as integration benefits from Maribor are realized, with a consequent increase in earnings.
That said, our projections include significant potential dividend payments of about 30%-35% of net income, as well as share buybacks, which may total 10% of capital over that period.
We expect Sava Re will generate close to 24 million euro of net income in 2014, implying a return on equity of between 9% and 10%. We expect the net combined (loss and expense) ratio to average approximately 96% in 2014 to 2016.
We continue to regard Sava Re's risk position as moderate. Our opinion reflects potential capital and earnings volatility, due to the group's Increasing complexity following the Maribor acquisition, ongoing exposure to catastrophe risk, and the significant book of inward reinsurance business, which currently represents about 15% of total premium income. We note that Sava Re was affected by a severe ice storm in Slovenia in the first quarter of this year. However, its net loss was less than 5 million euro, which is in line with expected catastrophe losses in 2014.
Within our risk position assessment, we note that Sava Re has significantly decreased its exposure to Slovenian assets as a percentage of capital, as a result of the Maribor consolidation. However, the positive effect has been somewhat offset by the reallocation of assets, mostly to government and covered bonds in EU member states, and by write-offs and impairments of subordinated bonds and equities of Slovenian banks during 2013, at a cost of 34.3 million euro.
We regard Sava Re's enterprise risk management (ERM) and management and governance practices as neutral for the ratings at adequate and satisfactory, respectively. Given the group's size and increasing complexity, we now regard ERM to be of high importance to the group.
Under our criteria, we continue to regard Pozavarovalnica Sava d.d. as a core entity within the Sava Re group. It is the group's main reinsurance and holding company, accounting for 77% of the consolidated gross premiums written, which totaled 387 million euro in 2013.
In accordance with our criteria for government-related entities (GREs), it is our view that there is a "moderately high" likelihood that the Slovenian government would, if necessary, provide timely and sufficient extraordinary support to Sava Re in the event of financial distress. This view is based on our assessment of Sava Re's:
* "Important" role for the Slovenian economy; and
* "Strong" link with the Slovenian government, its 25% shareholder via Slovenska odškodninska družba, d.d.
The 'BBB+' rating on Sava Re exclusively reflects Sava Re's group credit profile, which we assess at 'bbb+', without any uplift from its GRE status.
The stable outlook reflects our view that Sava Re and its subsidiaries will maintain a strong competitive position, with similarly strong consolidated capital and earnings. We expect that Sava Re will generate more robust earnings in 2014 and the next two years, enhanced by its larger size, stricter underwriting, and stronger position in Slovenia's direct insurance market following the Maribor acquisition.
We may lower the ratings on Sava Re if the group's capital and earnings significantly weakened to an upper adequate level, due most likely to a combination of technical underperformance of the insurance operations, increased dividend payments, and substantial share repurchases.
A positive rating action is possible if we see an improved, reasonably stable, earnings track record emerge following full integration of Maribor, with capital and earnings improving to a very strong level. We expect that given Sava Re's current portfolio mix and capitalization, it would likely pass our stress test for rating above the sovereign rating on Slovenia “
($=0.7398 euro)