Moody’s Investors Service has upgraded NN Group N.V.’s (“NN”) long-term (LT) issuer rating to A3 from Baa1 and changed the outlook to stable from positive. Consequently, Moody’s has also upgraded the subordinated debt rating of NN to Baa1 (hyb) from Baa2 (hyb) and the senior unsecured MTN programme rating to (P) A3 from (P) Baa1.
The rating action is driven by NN’s strengthened market position and improved business and earnings diversification in recent years.
The upgrade of NN’s ratings is also driven by the ability of the group to maintain a strong level of capital despite volatility in financial markets, as evidenced by the 197% group’s Solvency II ratio as at year-end 2022, and to maintain good profitability levels.
Following the acquisition of VIVAT Schadeverzekeringen N.V., NN is now the leading non-life (excluding health) player in the Dutch market and has materially improved its business and earnings diversification, with the non-life business now representing 28% of the group’s revenues (gross premium income) and 14% of its operating results (only considering insurance division, and excluding banking and asset management).
While the operating result of the group declined in 2022 (€1,743 million, down from €2,036 million in 2021), reflecting lower results from its asset management division, Moody’s mentioned that the group’s combined ratio remains at a good level (95.8% in 2022, up from 93.5% in 2021) and that the Dutch life operating result improved (to €999 million up from €986 million in 2021). Moody’s also noted positively that the results from the non-Dutch European business remained resilient.
The rating agency also said that the financial leverage of the group significantly increased in 2022 (according to Moody’s calculations), driven by a reduction in the group’s shareholders’ equity (€16,005 million at YE2022 down from €32,888 million at YE2021).
However, this mostly reflected the decrease in the value of NN’s fixed income investments following the rise in interest rates in 2022, and Moody’s does not expect the company to crystalise these unrealised losses. Moody’s considers that NN Group’s leverage remains consistent with the group’s rating level.
NN’s A3 LT issuer rating reflects the financial strength of the entire NN Group and is based on the standard notching approach for senior debt issued by a non-operating holding company in the European Union, reflecting the structural subordination of bondholders against policyholders and Solvency II’s effective group supervision.
In a jurisdiction subject to group-wide supervision, such as the Netherlands, Moody’s applies a two notches difference between the senior unsecured debt issued by a non-operating holding company and the insurance financial strength rating of its main operations. NN’s Baa1(hyb) subordinated debt rating is one notch below the group’s issuer rating , which is in line with Moody’s standard notching practices.
NN’s outlook is stable, reflecting the rating agency expectation that the group will take actions to protect its profitability in the non-life business.
The growth prospects of the group remain moderate in its domestic mature market, but Moody’s expects NN to benefit from the upcoming pension reform in the Netherlands.
Positive rating pressure on NN’s ratings could occur over the next 12-18 months in case of:
- (1) Improved product and geographic diversification, with proven expansion of the business following the pension reform in the Netherlands, coupled to an increase of the share of non-domestic operating capital generation to above 33%;
- (2) Group Solvency II ratio improved to above 200% and maintained at this level for a sustained basis;
- (3) Return on Capital (Moody’s definition) increased to 8% or above, and maintained at this level.
Alternatively, negative rating pressure on the ratings could occur in case of:
- (1) weakening of the group’s business profile caused by deteriorated market positions in both domestic and overseas markets, or by an increase in product risk;
- (2) Group Solvency II ratio sustainably below 180% coupled to a deterioration of market sensitivities;
- (3) deterioration of profitability metrics, such as Return on Capital (Moody’s definition) sustainably below 5% or lower profitability caused by claims inflation, or more volatile earnings levels going forward.
Finally, Moody’s mentioned that NN remains highly reliant on investment margin related earnings from the Dutch run-off book of individual life and pensions products, with a high exposure to long-term guaranteed business, but Moody’s expects that NN will continue to tightly manage the risks associated with this legacy life book through a disciplined asset-liability management policy.
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by Louis Nonchez – AVP-Analyst Financial Institutions Group Moody’s France SAS
