The ratings reflect Dunav Re's balance sheet strength, which AM Best categorizes as strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
The upgrades reflect AM Best's improved view of the company's independence, taking into account local regulatory restrictions on the withdrawal of capital and the expected improvement in the financial strength of the parent company.
Dunav Re's risk-adjusted capitalization is assessed at the strongest level, as measured by Best's Capital Adequacy Ratio, and is expected to remain at this level, with internal capital generation supporting the company's moderate growth plans. Offsetting factors in the balance sheet strength assessment include concentration toward Serbia's financial system, the small size of the company's capital base and its high dependence on reinsurance. This latter factor is mitigated partially by the good credit quality of Dunav Re's retrocession panel.
Dunav Re has a track record of good, albeit volatile, underwriting performance, with a five-year average combined ratio (2014-2018) of 78%. In 2018, the company reported a combined ratio of 76%, but in 2014 the combined ratio exceeded 140% due to catastrophe losses. Prospectively, AM Best expects Dunav Re to achieve good but potentially volatile underwriting results, and to report an average return on equity of approximately 13%.
Dunav Re has a dominant position in its core market of Serbia, where it generates the majority of its business, with Dunav Insurance being its main cedant. The company profile is limited in terms of premium volumes and faces a potential increase in competition from international players over the longer term. The company is also active outside of its domestic market, where it writes approximately RSD 400 million in premiums.