OREANDA-NEWS. S&P Global Ratings said today that it revised its outlook on Spain-based reinsurer Nacional de Reaseguros to positive from stable. At the same time, we affirmed our 'A-' long-term insurer financial strength and counterparty credit ratings on Nacional.

The outlook revision stems from our view that Nacional will benefit from the profitable expansion of its business outside Spain, targeting selected business clients. The affirmation also reflects our expectations Nacional will maintain a leading role in the Spanish reinsurance market and preserve its S&P Global Ratings risk-adjusted capital adequacy very close to the 'AAA' level.

In our opinion, Nacional is now executing with discipline its business geographic diversification strategy. Nacional is slowly building a sustainable and profitable position outside Spain, and in particular in the Nordics, France, Italy, and Portugal. It is utilizing its established and proven expertise as a service-driven coverage provider for small-to-midsize companies with strong underwriting, management, and local presence. Success in this strategy would lead us to consider that Nacional had reduced its reliance on the Spanish market by strengthening its position in the highly competitive arena of international reinsurance.

Nacional's international portfolio has more than doubled in the past five years. It grew by 18% in 2015, accounting for over 30% of the company's total gross written premiums. Nacional aims for international business to generate over 35% of gross written premiums by 2018. Though gross results for the foreign business have not yet stabilized, Nacional reported a net combined ratio (non-life and life) of 90% for its foreign business in 2015, constituting a third of the total technical results. (A combined ratio below 100% signifies an underwriting profit.)

Nacional maintains its strong and profitable domestic competitive position. We expect Nacional's overall premiums to grow by around 3%-5% in 2016 and 2017, sustained by the foreign business. We estimate the net non-life combined ratio will remain below 95%, with little volatility.

We expect Nacional to maintain risk-adjusted capital adequacy very close to the 'AAA' level, based on our capital model. We forecast retained earnings, resulting from both stable performance and a conservative dividend payout (amounting to one-third of net earnings), to cover capital requirements from the growing business. Although the foreign business is increasing Nacional's exposure to catastrophe risk, which is generally absent in Spain, the majority of the new portfolio comes from proportional treaties. We expect conservative underwriting and comprehensive reinsurance covers to limit peak risks.

Our ratings on Nacional are one notch above the sovereign credit rating on Spain, and we could rate Nacional up to four notches higher than the sovereign as we regard its sensitivity to country risk in Spain as moderate. Nacional comfortably passes our hypothetical sovereign default stress test under our criteria for rating companies above the sovereign. In 2015, Nacional continued to reduce its exposure to domestic investments, which fell to 30% of total invested assets at year-end from 35% in 2014. Nacional's performance in the stress test was boosted by its implementation of the EU's Solvency II Directive, which caused the company's regulatory own funds to jump by almost 50%.

The positive outlook indicates that we could raise the ratings on Nacional during the next 12-24 months if the reinsurer continues to successfully and profitably expand its business outside Spain. We expect foreign business to reach around 35% of total premiums and at least 25% of total earnings, with Nacional maintaining its leading position in Spain. The upgrade would depend on there being no material rise in volatility of earnings and capital from increased exposure to catastrophe risk, while Nacional maintains its overall financial risk profile at least in the strong category.

We could revise the outlook to stable if Nacional does not manage to successfully and profitably consolidate its position outside Spain; or if the planned growth of the foreign business were to generate increasing volatility in earnings, not offset by a consolidation of capital adequacy within the 'AAA' level.