Yesterday, S&P Affirmed the “A” financial strength and issuer credit ratings with a stable medium-term outlook of the Triglav Group, its parent company Zavarovalnica Triglav and the Group member Pozavarovalnica Triglav Re. The day before, Zavarovalnica Triglav published it is engaged in activities to potentially issue a new subordinated bond to serve as additional capital (Tier 2).
According to S&P, the affirmation reflects their view that Triglav’s capital adequacy will remain very robust, as well as that the Group’s performance is set to significantly recover following the adverse impact of natural catastrophes and health care reform in 2023.
Diving into the main drivers, the Agency divided the logic behind its affirmation into several main ones. Firstly, Triglav’s capital adequacy at the end of 2023 exceeded the 99.99% confidence level, implying strong capitalization. Furthermore, its regulatory solvency ratio was solid at 200% without transitional adjustments. Despite the weaker earnings in 2023, Triglav still distributed moderate dividends in 2024 and is expected to continue to do so. The Group also practices conservative capital and financial management, including strong reserving practices, which helps with the transition to the new reporting standards (IFRS 17). At the same time, S&P notes that the shareholders’ equity increased by 19%, boosting the total adjusted capital. Under the new capital criteria, Triglav’s capital adequacy buffers were strengthened due to higher future profits in life insurance and better diversification credit. The Group’s cons. Capital remains of good quality, as its stems primarily from shareholders’ equity.
The Group’s capital adequacy should remain above the highest confidence level through 2026. Continued optimizations of underwriting and investment exposure, maintenance of a conservative asset allocation, and reduction of the exposure to market risks from equity and private equity portfolios are also expected. The Group is also optimizing the underwriting volatility in natural catastrophe-exposed lines. Its robust capital levels provide a substantial buffer, which allows it to pursue growth opportunities in insurance and AM as well as manage increased risk retention from natural catastrophes, economic uncertainty, and moderate capital market volatility. As such, Triglav is expected to maintain capitalization at least at the 99.95% confidence level in the next couple of years.
In terms of the op. performance, S&P noted that it improved significantly in Q1 2024, with a non-life combined ratio of 87.9%, strong new business margins in life insurance, as well as overall CSM growth. In Q1, the Group recorded a net income of EUR 36.6m, up 154% YoY, due to material price increases offsetting inflation and fewer large claims in the non-life primary and reinsurance business. With the normalization of large claims expected for the rest of 2024, the combined ratio should stabilize between 90-94%. Continued strong earnings from the life insurance and AM business are also expected. As such, the Group is well positioned to achieve a net income of EUR 80m-100m, with an ROE of 9-11% in 2024 and beyond.
Meanwhile, the discontinuation of Triglav’s supplementary health line at the end of 2023 is considered credit neutral, as the business was transferred to the state universal health insurance. This transfer and Triglav’s adjustments to its health operations are not expected to have a negative impact on 2024. Furthermore, the Group has also agreed with the state on the compensation for the state-induced price cap that caused health insurance losses in 2023, which resulted in a one-off payment of EUR 11m in 2024. As such, Triglav is expected to continue developing complementary health insurance offerings in its primary insurance markets.
S&P also noted that after severe natural disasters in 2023, Triglav secured robust reinsurance protection for 2042 despite the lower capacity and higher prices in the international reinsurance markets. Triglav also readjusted its reinsurance program slightly, leading to a more moderate increase in risk retention. However, S&P doesn’t expect this to cause significant capital or earnings volatility due to Triglav’s balance sheet buffers and ongoing adjustments to the price and scope of coverage in its catastrophe-exposed lines. Triglav is anticipated to continue protecting its balance sheet from significant volatility with effective and cost-competitive reinsurance protection.
Also, strong premiums and revenue growth in 2023 and Q1 2024 are expected to support Triglav’s further underwriting results. The Group achieved a 12% premium growth in 2024, and although the Q1 2024 growth was flat due to the discontinued supplementary health business in Slovenia. However, Triglav’s non-life business growth in Q1 almost offset the loss in this category. In terms of the ongoing business, revenue growth is widespread in both products and regions. Much of the growth comes from increased prices due to incorporating the most recent loss cost trends. The Group also continues to add risk in its domestic and international primary, as well as reinsurance businesses. Still, with inflation falling, combined with the strong price increases in the Group’s Slovenian motor business, S&P expects growth will by mainly supported by property insurance in Slovenia and abroad. With continued expansion, S&P expects premium growth will remain strong in 2025-2026, at 5-8%.
Lastly, S&P commented on what could lead to a raise or a decline in the rating in the next 2 years.
A raise in this period could come if: firstly, Triglav further diversifies its operations, materially improves its performance and the scale of its core foreign operations, and retains sound overall profitability and capital adequacy. Secondly, if Triglav’s absolute capital continues to increase while the relative exposure to investment and underwriting risks remains limited, supporting the sustainability of Triglav’s financial risk profile. Thirdly, if sustainable economic growth increases Slovenia’s GDP per capita further towards the eurozone average, strengthening the Group’s prospects for profitable domestic growth and solidifying its risk profile.
On the other hand, S&P could lower the ratings if Triglav incurs very large losses, for example, due to severe combined global and domestic market stress while external conditions derail sound economic developments in Slovenia.
Further, Triglav recently notified of the possible issuance of a subordinated bond (Tier 2). The potential amount was not specifically stated. However, as stated by the company, the issuance will “provide an appropriate basis for growth and development”, alongside regular capital management activities, thus ensuring optimal structure of capital. This could mean that potentially Triglav might soon grow on the back of M&A activities. To emphasize, Triglav Group has already issued EUR 50m of one subordinated bond prior to this.
At the end of May 2024, the NAV of Croatian mutual funds increased by 2.4% MoM and 33.7% YoY, amounting to EUR 2.67m. This marks the second consecutive month of YoY growth exceeding 30%, a trend not seen since early 2017, indicating strong momentum in NAV development. Despite this increase, the NAV remains 13.7% below its pre-COVID-19 peak.
According to the latest report by the Croatian Financial Services Supervisory Agency (HANFA), the NAV of Croatian mutual funds saw substantial growth in May 2024, rising by 2.4% MoM and 33.7% YoY, reaching EUR 2.67bn. This growth narrows the gap to the pre-pandemic peak, now only 13.7% below it. In April, the NAV recorded a 32% YoY growth rate, the highest since early 2017, and May’s 33.7% YoY growth set a new record once again.
To understand this growth, it is essential to examine the primary drivers: changes in the underlying value of assets and net contributions to the funds. In May, net contributions totaled EUR 25m, mainly driven by investments in cash funds, which accounted for EUR 23.1m. Equity funds followed with net contributions of EUR 1.9m, while other fund types saw no significant changes. Over the past twelve months ending in May, net contributions reached EUR 565.8m, compared to EUR -172m in the same period last year, indicating improved retail sentiment and confidence.
Net contributions to the Croatian mutual funds (January 2021 – May 2024, EURm)
Source: HANFA, InterCapital Research
In terms of absolute changes, the NAV increased by EUR 673.3m YoY and EUR 61.5m MoM. Notably, 84% of the annual growth stemmed from net contributions, while on a MoM basis, app. 40% of the growth came from net contributions. As such, it could be said that in a longer time frame, net contributions had the largest impact, while in the short term, the increase in the value of assets played the more important role, both of which are positive developments.
Examining the monthly changes in asset values, money market holdings saw the largest increase of 17.5%, or EUR 24.8m, followed by shareholdings, which rose by 4.4%, or EUR 18.9m. Other categories combined, i.e. investment funds, bonds, deposits, and cash grew by EUR 22m, while receivables decreased by 10.5%, or EUR 2.4m. Meanwhile, on a YoY basis, money market holdings surged by 353%, or EUR 130m, followed by receivables, which grew by 169%, or EUR 13m. However, the largest absolute increase was in bond holdings, which grew by EUR 253m, followed by deposits and cash at EUR 146m, and shares, at EUR 141m. The only category to decline was investment funds, which decreased by 2.8%, or EUR 5.8m.
Total assets of the Croatian mutual funds (January 2015 – May 2024, EURm)
Source: HANFA, InterCapital Research
Moving on to securities and deposits, in May 2024, they amounted to EUR 2.63bn, growing by 2.9% MoM, and 36.6% YoY. Of this, EUR 1.7bn, or 64.9% was held in foreign securities and deposits, while the remaining 35.1% was held in domestic. Both domestic and foreign securities and deposits grew, both on a MoM and YoY basis.
Finally, taking a quick look at the current asset structure of the mutual funds, the largest share was held by bonds at 53.8%, representing a decrease of 0.99 p.p. MoM, and 5.53 p.p. YoY, followed by shares at 16.7% of the total, growing by 0.32 p.p. MoM, and 1.41 p.p. YoY. Next up, there are deposits and cash, which accounted for 15.1% of the total, declining by 0.04 p.p. MoM, but growing by 2.18 p.p. YoY. Finally, we have inv. funds and money market holdings, which accounted for 7.5% and 6.2% of the total, respectively, recording slight changes MoM, but declining by 2.81 p.p. YoY, and growing by 2.18 p.p. YoY, respectively.
Current AUM of Croatian mutual funds (% of the total, May 2024)
Source: HANFA, InterCapital Research