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Overview -- On Dec. 11, 2012, Pozavarovalnica Sava, d.d., the parent and major operating entity of the Sava Re Group (Sava Re), agreed to pay EUR15 million to acquire a further 11.8% stake in its subsidiary Zavarovalnica Maribor (Maribor) from Nova KMB (NKBM). -- Pozavarovalnica Sava already owned 49% of Maribor, and has agreed to buy the remaining 39.2% stake in the company for EUR50 million after a EUR55 million capital increase planned for May 2013. The remaining stake has been temporarily bought by Pozavarovalnica Sava's major shareholder, Slovenska odškodninska družba (SOD). -- In our view, the planned rights issue carries some execution risk, and the acquisition could weaken our view of Sava Re's currently "adequate" capital adequacy, under our criteria. -- We are accordingly placing our 'BBB+' ratings on CreditWatch with negative implications. -- The CreditWatch placement reflects the possibility that we may lower the ratings on Pozavarovalnica Sava if the group's capital adequacy were to weaken to low adequate or marginal levels as a result of the acquisition of the remaining 51% participation in Maribor and its full consolidation. Rating Action On Dec. 14, 2012, Standard & Poor's Ratings Services placed on CreditWatch with negative implications its 'BBB+' counterparty credit and insurer financial strength ratings on Slovenia-based reinsurer Pozavarovalnica Sava d.d. Rationale The CreditWatch placement reflects our view that capital adequacy for the Sava Re Group (Sava Re) may weaken as result of the acquisition of 51% additional stake in and full consolidation of subsidiary Zavarovalnica Maribor (Maribor). Pozavarovalnica Sava, the parent and major operating entity of Sava Re, will pay EUR65 million to acquire the remaining 51% participation in Maribor, giving it 100% control of the No.2 Slovenian direct insurer. The deal will be financed via: -- Own funds of EUR15 million, and -- Capital increase of EUR55 million planned in May 2013. As of year-end 2011, Maribor comfortably covered over 2.0x its minimum regulatory solvency margin. Maribor appears to be adequately capitalized based on our preliminary estimates, which do not include potential consolidation adjustments and integration costs. We also see some execution risk associated with the EUR55 million rights issue planned in May 2013. In particular, if the issue is not fully underwritten, it may prompt Sava Re to use more of its own capital than initially planned to finance the acquisition. In our view, the acquisition of Maribor carries a limited integration risk for Sava Re, which has been Maribor's second-largest shareholder since 2000. Maribor's supervisory board comprises six members, two of which are representatives of Sava Re. Sava Re is also Maribor's major reinsurer. We consider that Sava Re's competitive position would significantly benefit from this deal, as it would provide it with size and a leading position in the Slovenian direct insurance market. The ratings on Pozavarovalnica Sava reflect Sava Re's diversified insurance portfolio, which is well-balanced between primary and reinsurance premium income; strong liquidity; and very good levels of capital. These strengths are offset, however, by Sava Re's lack of a strong position in at least one sizable and stable insurance market, and difficult macroeconomic and financial conditions in Slovenia. CreditWatch Standard & Poor's aims to resolve the CreditWatch placement within the next six months, by which time we expect the company to have completed the capital increase, giving us a clearer understanding of Sava Re's final level of capital adequacy. The CreditWatch placement reflects the risk that Sava Re's capital adequacy may deteriorate to low adequate or marginal levels as a result of the acquisition and full consolidation of Maribor. We could lower the ratings on Pozavarovalnica Sava by one notch should the capital increase planned in April 2013 be only partially successful, prompting Sava Re to use a higher-than-expected level of its own capital to finance the deal. This would weaken our view of its capital adequacy, which is currently adequate. We could also lower the ratings if the capital increase is successful, but consolidation adjustments, integration costs, and effective levels of capital adequacy at Maribor weaken Sava Re's consolidated capital adequacy to marginal levels. We could affirm the ratings if the capital increase is successfully completed and Sava Re's resulting consolidated capital adequacy remains at least adequate. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal. -- Principles Of Credit Ratings, Feb. 16, 2011 -- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Group Methodology, April 22, 2009 -- Interactive Ratings Methodology, April 22, 2009 -- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Pozavarovalnica Sava d.d. Counterparty Credit Rating Local Currency BBB+/Watch Neg/-- BBB+/Negative/-- Financial Strength Rating Local Currency BBB+/Watch Neg/-- BBB+/Negative/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.