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May 23 (The following statement was released by the rating agency)
Fitch Ratings has downgraded SNS REAAL N.V. (SNS
REAAL) insurance entities, SRLEV N.V. and REAAL Schadeverzekeringen
N.V.(together, REAAL Insurance), to Insurer Financial Strength (IFS) ratings
'BBB' from 'BBB+'. The Outlooks are Stable.
KEY RATING DRIVERS
The downgrade reflects REAAL Insurance's weak profitability, high financial
leverage and Fitch's expectation that these metrics will remain under pressure,
impairing the insurance group's financial flexibility. The ratings also reflect
uncertainty over the future ownership of REAAL Insurance, following the
nationalisation of SNS REAAL, and in light of the Dutch State's commitment to
the sale of REAAL Insurance.
Fitch views REAAL Insurance's profitability and interest coverage as weak. REAAL
Insurance posted a EUR625m loss in 2013 (2012: loss of EUR149m). Fitch believes
that REAAL Insurance's underlying profitability is likely to remain under
pressure in the coming years, due to the low interest-rate environment,
difficult domestic economic conditions and fierce competition in the Dutch
REAAL Insurance's financial leverage was 42% at end-2013 (2012: 48%), which
Fitch views as manageable, as the group is still restructuring. However, this
level is high for the rating and relative to peers.
The existing intragroup positions between SNS Bank N.V. and REAAL Insurance have
been reduced, which Fitch views positively. This action reduces group complexity
and makes the bank and the insurers more independent from a capital and
liquidity perspective ahead of the sale of the insurance operations.
In December 2013, the European Commission (EC) announced its final decision
concerning the restructuring plan of SNS REAAL, after it was nationalised in
February 2013. As a fully owned subsidiary of SNS REAAL, REAAL Insurance was
also nationalised. In the restructuring plan, the Dutch State has committed to,
among other measures, the sale of the group's insurance operations. The decision
generates uncertainty over the future of REAAL Insurance.
REAAL Insurance's ratings are underpinned by its strong presence in the Dutch
insurance market, notably in life and pensions. SRLEV N.V. now ranks third among
Dutch life insurers, with a market share of around 16%. REAAL
Schadeverzekeringen is a significant non-life player, with a 6% market share.
REAAL Insurance's capital position is also sound, in Fitch's opinion. At
end-December 2013, REAAL Insurance's regulatory solvency was 172% (2012: 176%),
after receiving EUR250m from SNS REAAL in the form of a capital injection during
2013. As long as the insurance activities remain within the state-owned group
SNS REAAL, the nationalisation should not affect the solvency of the insurance
The EC also decided in 2013 to disallow SRLEV N.V. from paying the coupons of
its subordinated bonds, which in Fitch's view, continues to impair REAAL
Insurance's financial flexibility. However, the Dutch State has demonstrated its
support for several financial institutions, including SNS REAAL in recent years.
Key ratings drivers for a downgrade are a further material loss in 2014, a
decline in the regulatory solvency ratio to below 125% or financial leverage
remaining above 40%.
An upgrade could result if the company returns to profitability, in line with
the 'A' rating category (for example, if reported net income rises to around
EUR200m and is expected to remain at that level), if financial leverage falls to
35% or below and if the company resumes payments on subordinated bonds.
The ratings may also be influenced by developments over the next few months
relating to the future ownership structure and restructuring plan and possible
additional requirements that could be imposed by the EC.