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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 insurance market.
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 entities.
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.