Standard & Poor’s Ratings Services lowered its long-term counterparty credit and insurer financial strength ratings on Polish non-life insurer Towarzystwo Ubezpieczen i Reasekuracji WARTA S.A. (WARTA) to ‘BBB’ from ‘A-‘. The outlook is developing.
The downgrade follows the recent announcement of WARTA’s ultimate parent company KBC Group N.V. (A-/Stable/A-2; core insurance operations rated A/Stable/–) that its revised strategy includes plans to divest its Polish bank and insurance operations to repay the state aid it received after the financial crisis in 2009. KBC published this information in a press release on July 13, 2011. This has led us to revise our assessment of WARTA’s group status to “nonstrategic” from “strategically important” and the implied group support to one notch from three notches previously.
The planned divestment of KBC’s Polish operations replaces other measures in its original strategic plan to generate funds, which was approved by the European Commission in November 2009. Approval of the revised strategic plan from the European Commission is still pending and the time frame for the potential disposal of WARTA is uncertain.
“We believe nevertheless that WARTA will no longer be a strategically important part of KBC’s bancassurance strategy in the future,” said Standard & Poor’s credit analyst Johannes Bender. “However, we still factor in one notch of implicit support into the ratings because we believe that KBC will stay committed to WARTA until the company is sold.”
Our assessment of WARTA’s stand-alone credit profile incorporates an analysis of the company’s consolidated financials, including potential financial risks arising from its major subsidiaries. In our view, WARTA’s stand-alone credit profile continues to benefit from strong capitalization and a good competitive position as a major insurer in Poland. Offsetting factors are, in our view, WARTA’s marginal operating performance, which albeit visibly improving in 2011, still needs to demonstrate a longer positive track record. In addition, we think that the company’s new management team needs to demonstrate that it can sustain the turnaround in the future.
The developing outlook reflects the uncertainties regarding a potential buyer for WARTA. According to our group rating methodology, the ratings on WARTA under a new owner could benefit from group support or be revised to reflect our assessment of WARTA’s stand-alone credit profile, depending on the financial strength of the eventual buyer, WARTA’s strategic importance for its new owner, and the degree of integration into the new parental structure.
“On a stand-alone basis, we expect WARTA to defend its good competitive position, stop market share erosion, and maintain strong capitalization in 2011,” said Mr. Bender. “We expect to see an upward trend in earnings in 2011.”
According to our group rating methodology, we could raise the ratings if WARTA’s potential owner has a financial strength that is higher than ‘BBB’ and if our criteria for group support are met. We could also raise the ratings if WARTA demonstrated a sustainable improvement of its operating performance and management continued to successfully execute the turnaround.
We could lower the ratings to those indicated by the stand-alone credit profile if the financial strength of a potential buyer is not sufficient or if our criteria for group support are not met.
We see limited downside for our assessment of WARTA’s stand-alone credit profile, owing to our assumption that WARTA’s capitalization will remain unchanged and its operating performance will keep improving.
Source : Standard & Poor’s
