LJUBLJANA (Slovenia), July 27 (SeeNews) – Ratings agency Standard&Poor’s (S&P) said it has revised its outlook to positive from stable on Pozavarovalnica Sava, the core operating entity of Slovenia-based insurance group Sava Re, while affirming its 'A-' long-term insurer financial strength and counterparty credit ratings.
"The outlook revision stems from our view that Sava Re's overall financial strength is likely to strengthen on the back of its improved risk position and an increased focus on operational efficiency, as well as better macroeconomic conditions in Slovenia", S&P said in a statement late on Wednesday.
The positive outlook indicates that the ratings agency could raise the ratings on Pozavarovalnica Sava over the next 12-24 months if Sava Re continues to build a track record of stable capital and earnings, growing its business profitably, further improving its operating efficiency, and maintaining capital adequacy in excess of the 'AAA' threshold.
S&P also said:
"In recent years, Sava Re has undertaken measures, both on the underwriting and investments sides, that lead us to see a smaller likelihood of capital and earnings volatility. Thanks to Sava Re's acquisition of Zavarovalnica Maribor in 2013, primary insurance operations account for around 80% of gross premium written, providing a more stable earnings contribution. In our view, the group has reduced its risk appetite in both investments and underwriting, particularly in the international reinsurance markets. Sava Re has enhanced its overall catastrophe risk management, and we expect the insurer to maintain conservative underwriting, while the reinsurance business continues to contribute to the group's bottom line and business diversification.
We estimate that Sava Re's net property/casualty combined (losses and expenses over premiums) ratio will improve to below 95.0% over the next two years from a five-year average of 95.8%. We expect stable levels of claims over premiums and conservative reserving. We notice that Sava Re's level of expenses over premiums remains higher than that of peers, and we expect the improving combined ratio to be driven mainly by increased scale and strengthened operational efficiency. Last year Sava Re merged its primary insurance carriers in Slovenia and Croatia, temporarily increasing its cost ratio, and we expect that the merger's benefits will materialize gradually over 2017-2019. We project that Sava Re will report post-tax earnings of around €33 million in 2017, followed by modest increases over the coming two years.
Also, we anticipate that improved macroeconomic conditions in Slovenia (see " Slovenia Ratings Raised To 'A+/A-1' On Improving Debt Dynamics; Outlook Stable, " published June 16, 2017, on RatingsDirect), will support Sava Re's premium growth at around 2%-4% in 2017-2019. We also factor in the group's conservative underwriting of its reinsurance business. The average credit quality of the investment portfolio is 'A', and exposure to assets we regard as risky has been reduced to very conservative levels versus the adjusted capital. Furthermore, we have greater visibility on Sava Re's exposure to catastrophe risk and expect the group will maintain risk-adjusted capital adequacy above the 'AAA' level, based on our capital model, as retained earnings cover capital requirements for growing business.
Despite these strengths, we note that the tangible benefits of Sava Re's focus on operational efficiency have yet to materialize and that it has a shorter track record of stable capital and earnings compared with higher-rated peers. We factor this into the ratings by applying a negative notch under our holistic analysis.
The positive outlook indicates that, in the next 12-24 months, we are likely to raise the ratings if Sava Re:
- Builds a longer track record of stable capital and earnings on the back of continued conservative underwriting and stable asset risk and;
- Demonstrates premiums and earnings growth in its primary and reinsurance businesses, reporting a level of expenses over premiums to be more in line with peers; and
- Retains its 'AAA' capital adequacy, as per our models.
We would consider revising the outlook to stable over the next 12-24 months if Sava Re's:
- De-risking and operational efficiency measures do not lead to stable and improved earnings levels; or
- Capital adequacy weakens from extremely strong levels.
In the next 12-24 months, we would likely lower the ratings if a financially weaker company were to take over Sava Re."