Yesterday, Sava Re published a press release talking about its Strategy for 2023-2027, Business Plan for 2023, as well as the implementation of the IFRS 17 and IFRS 9.

According to the Company, it achieved all its key objectives in the 2020-2022 strategy period. Through organic growth and the acquisition of Vita, the Group increased its revenue by 23% to EUR 720m during the three years and achieved an average ROE of over 13%.

For the 2023-2027 period, the Group has adopted a new strategy focusing on three key priorities.

Firstly, the Group will take its customer-centric approach to the next level, ensuring that customers, their wishes, and their needs are central to the way business is done. To achieve this, they have set out three objectives. Firstly, the integration of all communication channels through a centralized customer relationship management system. Second, the establishment of a hybrid sales model, and third, the set up of self-care digital solutions.

The second priority is the optimization of business processes. This will include the speed up and simplification of customer service as well as internal processes. This will also help with cost efficiency, especially in the current macroeconomic environment. To achieve this, the Group will run a comprehensive review of its processes to identify opportunities for improvement.

The third priority is to pursue sustainability in all key areas, including the environment, society, and governance. They will continue supporting the global sustainability trends and focus on goals related to climate change and care for the health and well-being of its customers, employees, and the wider community.

Regarding growth and profitability, the Group has set the following strategic targets for the period 2023-2027:

The Group’s op. revenue (GWPs +other op. revenue) is planned to grow at an avg. annual rate of at least 4%, reaching more than EUR 900m in 2027. The primary goal of the Group will remain to maintain appropriate profitability as measured by the combined ratios, which are estimated to stay under 95% for the insurance and reinsurance business. Through this, the Group will focus on cost efficiency, which should come under pressure from the inflation as well as CAPEX needed to realize the key business goals. Target ROE is set between 9.5% and 10.5%, already taking into account the new accounting standard, IFRS 17, which will enter into force on 1 January 2023. The transition to the new accounting standard will not change the business model, long-term profitability, or cash flow generation capacity, although the outputs of financial reporting are expected to change. Management also expects a slight increase in equity.

The main objectives of the investment policy continue to be maintaining a safe structure and strong rating profile of the investment portfolio, ensuring the Group has sufficient assets to meet its liabilities under insurance contracts and making sure that financial market volatility has only a limited impact on the profit for the year. Given the current state of the financial markets, the rise in interest rates will positively impact investment income and consequently profit growth. Over the strategy period, the return on an investment portfolio is expected to rise to 2.2% in 2027.

At the same time, the Group plans to ensure a high level of financial stability, aiming at a solvency ratio of 170-210%, which is the optimal level of capitalization for the risk appetite set in the new strategy period. The dividend policy remains consistent with that of the current strategy period and, to support a policy of stable dividend growth, a dividend payout ratio of between 35% and 45% of the Group’s net profit is estimated.

The Group also briefly commented on the business plan for 2023.

Activities in 2023 will be aligned with key strategic priorities. In 2023, the Group plans to generate more than EUR 800m in op. revenue, representing a 4% growth compared to 2022, with growth planned across all markets where the Group is present. The target combined ratio is expected to remain below 95%, and the return on an investment portfolio is planned at more than 1.5%. The Group expects to achieve a net profit of at least EUR 53m, which translates into an ROE of at least 9.5%. This takes into account both the IFRS 17 and IFRS 9 accounting standards.

Expanding on these standards further, the Group’s financial targets are based on both of them, as they come into effect on 1 January 2023. They are not expected to have a material impact on reported profit as 60% of the Group’s current op. revenue is accounted for using the “simplified method”, which is very similar to the current approach. Under the current circumstances, the impact on the investment result is expected to be minor due to the high quality of the investment portfolio.

Ericsson NT signed contracts with the Ministry of Justice and Public Administration, the Ministry of the Interior, as well as the Croatian Health Insurance Fund, worth a total of HRK 19m.

The first mentioned contract is for the development of modules with new functionalities for the improvement of the human resource management (HRM) system, through the reform measure “New models of salaries and work in the civil service and public services” within the framework of the National Recovery and Resilience Plan 2021-2026. The subject of the Contract is the optimization, digitalization, and modernization of key processes in the field of HRM. Successful implementation will speed up and standardize the current way of working and communication in processes related to human resources.

Next up, they have signed a contract with the Croatian Health Insurance Fund for the procurement of adjustment and migration services of the CEZIH application system and associated data from the old hardware and software base in the SSC and testing and parallel operation of the existing system and the new one. This Project represents the continuation of the modernization of the Central Health Information System of the Republic of Croatia.

With the Ministry of Interior, they have signed a contract for the maintenance of stationary thermal imaging systems of the green border. The contract was signed in cooperation with the company Securitas Hrvatska. The project is related to the maintenance of existing stationary systems for monitoring the green border at 20 locations.

At the end of November 2022, the total NAV of Croatian pension funds amounted to HRK 132.9bn, which is an increase of 1.7% MoM, and 1.5% YoY.

The Croatian Financial Services Supervisory Agency, HANFA, has recently published the latest report on the Croatian capital market, including data on the Croatian mandatory pension funds. According to the report, in November 2022, the NAV of Croatian pension funds amounted to HRK 132.9bn, which is an increase of 1.7% MoM, and 1.5% YoY. At the same time, the net contributions into the pension funds amounted to HRK 705.4m in November, while on a YTD basis, they amounted to HRK 7.51bn.

Mandatory pension funds AUM structure change (January 2018 – November 2022, HRKbn)

Source: HANFA, InterCapital Research

Looking at the changes recorded by the asset holdings, on a monthly basis, the largest growth was recorded by bonds, which increased by HRK 1.49bn, or 1.8%. Following them, we have shares, which grew by HRK 1.01bn, or 4%, and other assets, with a growth of HRK 550.7m, or 162%. On the other hand, deposits and cash were the only categories to record a decline, decreasing by HRK 595.7m, or 7.9%. Considering the fact that, unlike the mutual funds, the net contributions into the pension funds are always positive, the increase in the value of bond and share holdings means that the assets recovered some of their value in November, but also that they diverted investments from other assets (such as deposits and cash), and that they invested the new contributions into bonds and shareholdings, primarily.

Moving on to the changes recorded on a yearly basis, the largest increase recorded is in the deposits and cash category, which increased by HRK 1.83bn, or 36%. Following them, we have bond holdings, which increased by HRK 1.58bn, or 1.9%. On the other hand, the largest decrease was recorded by the receivables category, which decreased by HRK 483.2m, or 3.2%, followed by the money market holdings at HRK 252.6m, or a decrease of 18%.

Again, given that the main job of the pension funds is to store and with as little risk as possible increase the value of well, pensions, the increase in deposits and cash, as well as bond holdings, is expected, as these asset types hold almost no risk in them. As the inflation in 2022 is the largest in Croatia’s history, however, even the reduction in risk that is gained by investing in bonds is hard to justify on one hand but makes sense on the other. The real short-term loss of value is of course the hard justification for investments in these asset types, but at the same time, due to the time horizon of the investments for the pension funds, 1-2 years of losses are more than made up with subsequent years of higher returns.

Moving on to the current asset structure of the pension funds, bond holdings still maintain the largest part, at 63.3%, representing an increase of 0.1 p.p. MoM, and 0.5 p.p. YoY. Shareholdings follow, at 20.1% of the total, an increase of 0.45 p.p. MoM, but a decrease of 0.2 p.p. YoY. Next up, we have investment funds, at 10.9%, representing an increase of 0.01 p.p. MoM, but a decrease of 0.5 p.p. YoY. Finally, we have deposits and cash, which account for 5.2% of the total, representing a decrease of 0.54 p.p. MoM, but an increase of 1.3 p.p. YoY.

Current mandatory pension funds AUM (November 2022, %)

Source: HANFA, InterCapital Research

Finally, looking at the securities and deposits, the domestic bond holdings accounted for 92.6%, an increase of 1.27 p.p. MoM, while the foreign bond holdings accounted for the remaining 7.4%. At the same time, domestic equity holdings accounted for 59.4% of the total equity holdings, representing a decrease of 0.66 p.p. MoM, while foreign equity holdings accounted for the remaining 40.6% of equity holdings.

As of November 2022, Fondul’s NAV reached RON 14.64bn, which would translate into a NAV per share of RON 2.5626, an increase of 20.7% YoY and a decrease of 4.5% MoM.

According to the latest Fondul Proprietatea’s NAV report (30 November 2022), Fondul reported a total NAV of RON 14.64bn (EUR 2.98bn), which translates into a NAV per share of RON 2.5626 (EUR 0.5210).

Comparing it on a YoY basis, the total NAV recorded an increase of 20.7%, while the NAV per share grew by 29.4%. Nevertheless, compared to September, NAV decreased by 5.1%.

Fondul Proprietatea’s portfolio structure still remains focused on the power utilities generation sector (76.9% of NAV) with Infrastructure (7.3%), Power & Gas supply and distribution (5.8%), and Oil & Gas (5.6%) following. This is also why the three biggest holdings, Hidroelectrica, OMV Petrom, and Aeroporturi Bucuresti amount to 87.3% of the total NAV of the Fund. In terms of the Fund’s portfolio structure, unlisted equities accounted for the vast majority of NAV, standing at 91.8%. Following them, we have listed equities with 6.8%.

Turning our attention toward the share price’s performance, during the month, the Company’s share price increased by 7.8%, ending the month at RON 1.92 per share. The current discount to NAV per share stands at 24.4%.

Fondul Share Price & NAV per Share

Source: Bloomberg, InterCapital

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Due to the nature of these events, they are subject to change (might be postponed or canceled).