Operating Profile Key Credit Factors Financial Profile Key Credit Factors Insurer Financial Strength Factor Scores Industry Profile and Operating Environment Business Profile Capitalisation & Leverage Debt Service Capabilities & Financial Flexibility Financial Performance & Earnings Investment & Asset Risk Asset/Liability & Liquidity Management Reserve Adequacy Reinsurance, Risk Mitigation & Catastrophe Risk Rating aaa aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+ bb 1 www.fitchratings.com | March 2018 Dutch Insurance Peer Review Dutch Insurance Peer Review Issuers Aegon NV NN Group NV VIVAT NV IFS / Outlook A+ / Stable A+ / Stable BBB+ / Stable Bar Colours = Relative Importance Higher Influence Moderate Influence Lower Influence Bar Arrows = Rating Factor Outlook Positive Negative Evolving Stable This Peer Review report compares and contrasts the key credit factors affecting the ratings of the insurers listed to the right. Fitch Ratings assigns a score to each of the nine key credit factors (as outlined in the table below) underlying the groups’ Insurer Financial Strength (IFS) ratings. These scores are denoted by lower-case letters and follow the same scale Fitch uses for its IFS ratings (ie ‘aaa’ through ‘c’). Each score’s relative influence (higher, moderate, lower) on the insurers’ ratings and the outlook (stable, positive, negative) is also shown. The information in this Peer Review is derived from the most recently published Insurance Ratings Navigator report on each organisation, which is developed based on the application of Fitch’s Insurance Rating Criteria. Links to the insurers’ individual Navigator reports, applicable criteria and other related research, are on the final page of this report. Aegon NN VIVAT Aegon NN VIVAT Aegon NN VIVAT Aegon NN VIVAT Aegon NN VIVAT Aegon NN VIVAT Aegon NN VIVAT NN VIVAT NN VIVAT Aegon NN VIVAT (Aegon not scored)
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
This Peer Review report compares and contrasts the key credit factors affecting the ratings of the insurers listed to the right.
Fitch Ratings assigns a score to each of the nine key credit factors (as outlined in the table below) underlying the groups’ Insurer Financial Strength (IFS) ratings. These scores are denoted by lower-case letters and follow the same scale Fitch uses for its IFS ratings (ie ‘aaa’ through ‘c’).
Each score’s relative influence (higher, moderate, lower) on the insurers’ ratings and the outlook (stable, positive, negative) is also shown.
The information in this Peer Review is derived from the most recently published Insurance Ratings Navigator report on each organisation, which is developed based on the application of Fitch’s Insurance Rating Criteria. Links to the insurers’ individual Navigator reports, applicable criteria and other related research, are on the final page of this report.
Aegon
NN
VIVAT
Aegon
NN
VIVAT
Aegon
NN
VIVAT
Aegon
NN
VIVAT
Aegon
NN
VIVAT
Aegon
NN
VIVAT
Aegon
NN
VIVAT
NN
VIVAT
NN
VIVAT
Aegon
NN
VIVAT
(Aegon not scored)
2www.fitchratings.com | March 2018
Dutch Insurance Peer Review
Factor Levels Capitalisation & Leverage
Aegon A+ NN A+ VIVAT BBB+
aaa
aa+
aa
aa-
a+
a
a-
bbb+
bbb
bbb-
Very Strong Capitalisation & LeverageFitch assesses capitalisation & leverage as ‘very strong’ for Aegon and NN, and ‘strong’ for VIVAT. The credit factor has high influence on the ratings. VIVAT’s capitalisation & leverage score is one notch below peers, due to the higher historical volatility of its capital metrics.
Prism FBM Scores Support Capital AssessmentFitch primarily focuses on its Prism Factor-Based Model (Prism FBM) for its assessment of insurers’ capital adequacy. Our Prism FBM scores support our view that insurers in the peer group are well capitalised. Prism FBM scores were ‘extremely strong’ at end-2016, with the exception of Aegon which scored ‘very strong’. However, we estimate NN’s Prism FBM score to have weakened to ‘Very Strong’ at end-1H17 following the acquisition of Delta Lloyd. Strong coverage ratios under the Solvency II (S2) regulatory regime also confirm our assessment of capitalisation. NN’s S2 ratio of 196% at end-1H17 was the strongest among peers. VIVAT’s end 1H17 S2 ratio was 171%, slightly below the same period last year, mainly due to unfavourable
market movements. Aegon’s S2 ratio improved to 185% at end-1H17, in line with the peer average.
S2 Sensitivities ManageableWe view the sensitivity of insurers’ S2 ratios to market factors, such as the widening of government bond spreads, as manageable. While S2 disclosures and sensitivities in particular inform our analysis, changes to S2 ratios from market movements are unlikely to directly, of themselves, affect ratings; this is because Fitch continues to focus on its own Prism Factor-Based Model as its primary assessment of insurers’ capital adequacy.
New Debt Drives Increasing LeverageWe forecast the financial leverage of both NN and VIVAT to have increased in 2017 to around 30%. VIVAT issued new debt in 2017 to support the capitalisation of its operating subsidiaries, while NN issued debt as part of financing the Delta Lloyd acquisition. Also, Delta Lloyd’s higher financial leverage contributed to the increase in NN’s financial leverage ratio post acquisition.
Higher Influence: Capitalisation & Leverage
15
20
25
30
35
40
2013 2014 2015 2016 2017estimated
(%) Aegon NNª VIVAT
a NN end-17 estimate includes Delta LloydSource: Companies, Fitch
Financial leverage ratios
100
150
200
250
300
Aegon NN VIVAT
(%) 1H16 1H17
Source: Companies, Fitch
S2 ratios
3www.fitchratings.com | March 2018
Dutch Insurance Peer Review
Factor Levels Financial Performance & Earnings
Aegon A+ NN A+ VIVAT BBB+
aaa
aa+
aa
aa-
a+
a
a-bbb+
bbb
bbb-
bb+
bb
Earnings a Key Rating WeaknessProfitability is a key rating weakness in the Dutch insurance sector. We consider a significant improvement as unlikely in the medium term. NN scored higher than peers for this credit factor, as it delivered the most balanced long-term financial performance, supported by earnings diversification. Aegon’s score reflects its weak but improving performance. Although VIVAT’s profitability has recovered in recent years, it has a weaker and more volatile track record over the longer term and has more limited revenue diversification relative to peers.
Life Closed Books Run Off Gradually Life insurance remains the main earnings source for all of the rated peers. Dutch life results are pressured by low interest rates and the lack of demand for higher-margin traditional life insurance and unit-linked savings products. We expect tight management of closed books through cash flow matching; interest rate risk hedging and cost controls will support life segment earnings. Pockets of growth in protection products, such as term life, could partly offset revenue declines from the gradual run-off of closed books.
Stabilising Non-life MarginsThe earnings contribution of non-life insurance is more modest compared to life insurance. Fitch expects continued price adjustments to lead to stabilising underwriting results in the P&C segment in 2018. However, both NN and VIVAT are exposed to the challenging MTPL segment, which could face further difficulties. NN’s underwriting margin in the Dutch business remained negative at end-1H17, pressured by increasing bodily injury claims, while VIVAT’s margin recovered strongly from the hailstorm hit in 2016. Aegon’s non-life operations are very small and do not have a material influence on the factor score.
Cost Savings Remain FocusWe estimate large Dutch insurers will cut annual costs by a further EUR650 million in 2017-2020, mainly through staff reductions and operational efficiencies. This includes the expected cost synergies from the integration of Delta Lloyd into NN. However, cost savings are unlikely to translate into significantly improved profitability, due to the gradual run-off of higher margin life policies and strong competition in non-life insurance.
Business Profiles Support RatingsThe business profiles and strong Dutch market positions of each company in the peer group is a key rating strength which supports ratings. Aegon and NN score ‘very strong’, which reflects their strong market positions, and the high level of product and international diversification. VIVAT scores ‘strong’, below peers, due to its smaller size, lack of international diversification and more modest market share.
Diverse Business ActivitiesNN’s acquisition of Delta Lloyd in 2017 positioned it as a contender for Dutch non-life market leader, and further reinforced its position as the life market leader. Aegon also has a strong market position in life insurance in the Netherlands, but its activities are more internationally focused, with
significant operations in the US and UK. NN also has insurance activities in various countries outside the Netherlands, but the proportion of the international business is more modest compared to Aegon. VIVAT is a large insurer in the Netherlands, with top five positions in both Dutch life and non-life insurance, but lacks international diversification.
Banking Adds to DiversificationNN and Aegon also have banking subsidiaries which contribute positively to their earnings and business diversification. Banking subsidiaries provide Dutch insurance groups with a vehicle to participate in the growing ‘bank savings’ market, as well as cross-selling opportunities. In addition, banking subsidiaries have become increasingly important participants in the mortgage origination market.
87%
Gross premium split (end-2016)
Source: Companies, Fitch
Aegon EUR23bn
13%
0
100
200
300
400
500
Aegon NN VIVAT
Asset split by geography(end-2016)
Dutch Non-Dutch
a 'other' segment assets shown as DutchSource: Companies, Fitch
(EURbn)
a
Life Non-Life
NN EUR9bn
17%
83%
VIVAT EUR3bn
27%
73%
5www.fitchratings.com | March 2018
Dutch Insurance Peer Review
Moderate Influence: Debt Service Capabilities & Financial Flexibility
Factor Levels Debt Service Capabilities & Financial Flexibility
Aegon A+ NN A+ VIVAT BBB+
aaa
aa+
aa
aa-
a+
a
a-
bbb+
bbb
bbb-
Factor Score ‘Strong’ to ‘Good’Debt service capability and financial flexibility are relative rating weaknesses for Aegon and VIVAT, whereas NN’s score is in line with its rating. VIVAT’s score of ‘good’ reflects its relatively weak long-term fixed charge coverage and more limited standalone financial flexibility compared to peers, although this assessment has improved in recent years.
Interest Expenses to IncreaseOur assessment of this credit factor is driven mainly by the insurers’ fixed charge coverage ratio (FCC), which in turn is driven by insurers’ profitability and financial leverage. A moderate increase in interest expenses is likely for VIVAT and NN due to increasing leverage in 2017; this could somewhat pressure FCC ratios. In 2016, VIVAT’s FCC of 4x was the weakest in the peer group, due to its weaker profitability. This compares to Aegon’s 7x (based on net underlying earnings) and NN’s 13x.
Adequate Financial FlexibilityFitch’s assessment of the financial flexibility of both Aegon and NN benefits from their established track record of accessing capital markets. VIVAT’s track record in this regard is somewhat weaker, being the only company in the peer group that is not listed publicly and that used to be reliant on its parent for financial support. However, VIVAT’s successful issuance of both senior and subordinated notes in 2017 reflects significant improvement in its standalone financial flexibility. Funding conditions for Dutch insurers further improved in 2017 with the normalisation of risk premiums, as measured by the z-spread falling below 200bp on long-term debt.
-10
-5
0
5
10
15
2013 2014 2015 2016 2017(estimated)
(x)
Fixed charge coverage ratios
Aegon NN VIVAT
Source: Companies, Fitch
6www.fitchratings.com | March 2018
Dutch Insurance Peer Review
Moderate Influence: Investment & Asset Risk
Factor Levels Investment & Asset Risk
Aegon A+ NN A+ VIVAT BBB+
aaa
aa+
aa
aa-
a+
a
a-
bbb+
bbb
bbb-
Low Investment Risk All insurers in the peer group scored ‘very strong’ for investment and asset risk, reflecting their conservative investment portfolios and low asset risks. Asset risk credit metrics are largely consistent among the three peers; Aegon’s slightly lower score reflects it’s relatively lower quality fixed-income portfolio compared to peers.
Fixed-Income Dominates PortfoliosDutch insurers’ general account investments mainly consist of fixed-income assets and Dutch residential mortgages, while other asset classes remain less relevant. VIVAT is overweight in fixed income investments compared to peers, with a high proportion of ‘AAA’ rated Dutch and German government securities, resulting from past capital constraints, preventing higher investment risk. With capitalisation restored, Fitch expects VIVAT to normalise its portfolio and conservatively re-risk, shifting some of its ‘AAA’ government bond portfolio to other higher yielding debt, mortgages, investment funds and real estate.
Low Risky Asset RatiosRisky assets ratios - defined as investments in non-investment-grade fixed-income securities and unaffiliated common stocks relative to equity - are low. Aegon’s end-2016 risky asset ratio was 55%, somewhat higher than that of VIVAT and NN (37% and 38% respectively), due to its higher exposure to non-investment grade bonds.
Increasing Mortgage ExposureMortgage investments in Dutch insurers’ portfolios have increased significantly in recent years, in an effort to earn higher yields in the low interest rate environment. Aegon and NN originate new mortgages through their own banking subsidiaries, which provide a steady supply of mortgage investments to their insurance business. VIVAT’s mortgage investments were significantly below peers, partly driven by conservative risk taking and the absence of a banking subsidiary, but we expect it to gradually catch up to peers. We believe higher mortgage investments do not translate into significantly higher credit risk; the Dutch residential mortgage market has historically been stable with low credit losses, underpinned by creditor-friendly legislation and a relatively high proportion of mortgages guaranteed by Nationale Hypotheek Garantie.
0%
20%
40%
60%
80%
100%
Aegon NN VIVAT
General account investment split (end-2016)
Fixed Income Loans & Mortgages Cash and equivalentEquities and similar Properties Other
Interest Rate Risk HedgedDuration gaps between assets and liabilities generate interest rate risk for all Dutch life insurers. Insurers manage this risk by matching cash flows as closely as possible and hedging residual interest rate risk. VIVAT’s lower score (‘good’) for this credit factor reflects its historically high duration mismatch, which contributed to weak financial performance as interest rates declined. Insurers have seen declines in the individual life insurance business in recent years as a result of market changes, and have mostly stopped selling traditional life products. The gradual run-off of closed book life portfolios will naturally reduce interest rate risk exposure.
Closed Books Adequately ManagedGuarantees in run-off life portfolios - including NN’s Japan and Europe, as well as Aegon’s US legacy variable annuity businesses - are closely managed through hedges, although perfect risk mitigation is not
possible. This results in some earnings volatility from time-to-time, but Fitch views the hedging programmes for capital market-related risks for both Aegon and NN as having been reasonably effective in recent years.
Low Liquidity RiskFitch views Dutch insurers’ liquidity positions as sound. Insurers regularly perform liquidity stress tests to ensure smooth operations in severe stress scenarios, including both market and insurer-specific events. However, an increased use of derivatives for hedging purposes by insurers could create higher liquidity needs, through higher collateral requirements in case of sharp unfavourable market movements.
Forecasted run-off of life closed books (number of policies)
Source: DNB, Fitch
8www.fitchratings.com | March 2018
Dutch Insurance Peer Review
Factor Levels Reserve Adequacy
Aegon A+ NN A+ VIVAT BBB+
aaa
aa+
aa
aa-
a+
a
a-
bbb+
bbb
bbb-
Lower Influence: Reserve Adequacy
Adequate ReservingDutch insurers score ‘strong’ for reserve adequacy. This credit factor has lower influence due to the relative smaller size of non-life operations in the overall business profiles. We do not score this credit factor for Aegon, given it is predominantly a life insurance-focused insurer.
Positive Run-off DevelopmentFitch considers the reserving practices of NN and VIVAT to be prudent; this is confirmed by loss development triangles, which show overall positive run-off results for the past five years. However, increasing bodily injury claims in the motor business could have an adverse effect on reserves, as reflected by NN’s EUR40 million reserve strengthening in 1H17.
Adequate Risk ManagementDutch insurers score ‘strong’ for this credit factor, which has a lower influence on their ratings due to the relative smaller size of non-life operations in the overall business profiles. As for reserve adequacy, we do not score this credit factor for Aegon, given its life focus (instead, these factors are assessed as part of asset/liability management). VIVAT’s risk management processes are fully independent of Anbang’s risk management framework; the strength of the risk management processes are ensured by regular interaction with the regulator, the Dutch Central Bank.
Good Quality Reinsurance ProtectionReinsurance is placed with a diverse panel of reinsurers with a minimum credit rating of ‘A-’. Fitch believes the reinsurance programmes of NN and VIVAT provide adequate protection against large losses, with conservative retention levels compared to equity.
The Navigator summarizes the main IFS rating(s) of the noted operating company, and/or operating company subsidiaries of the noted holding company.
Date ChangedThe ratings could be downgraded if, over a sustained period, the FLR rises above 30% or if the Prism Factor-Based Model score falls to below the "Very Strong" category.
The ratings could be upgraded if Aegon's net income ROE improves to above 7% for a sustained period with the Prism Factor-Based Model capital score remaining at least "Very Strong".
04-Apr-200713-Dec-201111-Dec-201520-Mar-2009
AA-A+AA
AAAA
Direct Peer Group
A-
AA-
Current IFS Previous IFS
AA-
Deterioration in Capital/Leverage
Weak Earnings The ratings could also be downgraded if net income ROE remains below 3%.
11-Apr-2016
Some Weakness Ineffective
Country Ceiling
Other Criteria ElementsSovereign-Related Constraint
No AAA
Negative
AA-
Insurer Financial Strength (IFS)IFS Recovery Assumption Good
Unadjusted Insurer Financial StrengthOther Factors & Criteria Elements Drivers
Aegon has a strong franchise and scale in its main markets - the US, the Netherlands and the UK - with top 10 positions in most of its chosen market segments.
The group’s capital strength is supported by a score of "Very Strong" in Fitch's Prism Factor-Based Model at end-2016.
Publish Date:
23-Aug-16 Downgrade
21-Feb-14
22-Oct-14
Vertical Bars = Range of Rating Factor
03-Aug-15
Affirmed
Netherlands
Capital-Light StrategyAegon is shifting its business mix from high-margin spread-based business to lower-margin, capital-light, fee-based business. While we view this strategy positively, it results in a compression of margins for the group.Relevant Criteria & References
Aegon N.V.
Business Profile Capitalization & Leverage
Weak ProfitabilityAegon’s profitability, driven by pressure from pricing competition and low interest rates in the main markets, is a key rating weakness. Fitch views Aegon's net income return on equity (ROE) of 2% in 2016 as moderately weak.
Stable Financial Leverage
Yes
Sensitivities
AA+
Aviva PlcAXA SALegal & General Group Plc
Improving Profitability
Assicurazioni Generali S.p.A.AA
01-Oct-2010NN Group N.V. Prudential plc
15-Jun-2009
AA-WD
Bar Arrows = Rating Factor Outlook
Bar Colors = Relative Importance
Allianz SE
Other Credit Factors
Start-up / Runoff Constraint Yes No n.a.
Aegon's Fitch-calculated financial leverage ratio (FLR) was 29% as at end-2016 (end-2015: 27%), a level that Fitch views as commensurate with the 'A' rating category, and in line with similarly rated peers.
NN’s profitability is strong, with a Fitch-calculated net income return on equity (ROE) of 6%, which we expect to remain stable. Fitch expects NN to realise significant synergies out of the Delta Lloyd acquisition.
Increased Leverage
Very Strong Capital
Bar Arrows = Rating Factor Outlook
Bar Colors = Relative Importance
Prudential plc
Other Credit Factors
Start-up / Runoff Constraint Yes No n.a.
Sensitivities
Aviva PlcLegal & General Group PlcVIVAT N.V.
Improved Financial Leverage or ROE
Aegon N.V.AA
19-Oct-2016
AA-WD
NN Group N.V.
Business Profile Capitalization & Leverage
Very Strong Business Profile
NN is a market leader in life and the second largest non-life insurer in The Netherlands following the Delta Lloyd acquisition. Operations in Europe and Japan add to the group's diversification.
Strong Profitability
Yes
Conservative Investment Exposure
NN’s investment exposure is conservative and supported by a risky assets/equity ratio of 38% at end-2016. General account assets are predominantly ‘A’ or higher rated fixed-income securities or mortgages.Relevant Criteria & References
23-Oct-17
02-Dec-16
Neutral
Debt Service Capabilities &
Financial Flexibility
Unadjusted Insurer Financial StrengthOther Factors & Criteria Elements Drivers
NN’s capital position remains a key rating strength despite the group’s key metrics weakening following the acquisition of Delta Lloyd on 7 April 2017. Fitch expects NN's Prism FBM score to fall to 'Very Strong' in 2017.
NN's financial leverage, as calculated by Fitch, increased to above 30% at end-1H17, from 22% at end-2016, as a result of the Delta Lloyd acquisition. However, Fitch expects leverage to improve.
Other Criteria ElementsSovereign-Related Constraint
No AAA
Negative
AA+
Insurer Financial Strength (IFS)IFS Recovery Assumption Good
Issuer Default Rating (IDR)
AABBB
Direct Peer Group
A+
AA-
Current IFS Previous IFS
AA-
Higher Financial Leverage or Lower ROE
Weaker Capital The ratings could also be downgraded if capitalisation weakens significantly, as measured by a fall in the Prism FBM score to below ‘Very Strong’.
Date ChangedThe ratings could be downgraded if, for a sustained period, financial leverage increases to above 32% or net income ROE falls to below 5%.
The ratings could be upgraded if, on a sustained basis, financial leverage improves to below 24% or net income ROE rises to above 8%, while NN’s Prism FBM Score remains at least ‘Very Strong’.
01-Oct-201023-Aug-201611-Dec-201515-Jun-2009
BBB+
The Navigator summarizes the main IFS rating(s) of the noted operating company, and/or operating company subsidiaries of the noted holding company.
We estimate that VIVAT’s financial leverage ratio had increased to above 30% at end-1H17 from 21% at end-2016 due to a new EUR650 million senior debt issue in May 2017.
Strong Capitalisation
Ownership Neutral To Rating
Bar Arrows = Rating Factor Outlook
Bar Colors = Relative Importance
Aegon N.V.
Other Credit Factors
Start-up / Runoff Constraint Yes No AAA
Sensitivities
Ethias SA
Improved Profitability, Lower Leverage
NN Group N.V. A+
BBB
VIVAT N.V.
Business Profile Capitalization & Leverage
Stable Dutch Market Position
VIVAT has a stable presence in the Dutch market, notably in life insurance. At end-2016, it ranked fourth in Dutch life with a 13% market share and fifth in non-life with a 5% market share based on gross premiums (excluding health).
Increased Financial Leverage
Yes
Volatile ProfitabilityProfitability could improve, supported by significant cost savings, and other management actions to improve underwriting performance. We estimate run-rate net income return on equity (ROE) of 4%-5%, but actual results could be volatile.Relevant Criteria & References
08-Jan-18
20-Jun-17
Neutral
Debt Service Capabilities &
Financial Flexibility
Unadjusted Insurer Financial StrengthOther Factors & Criteria Elements Drivers
We believe that the regulatory and governance framework under which VIVAT operates protects its capitalisation and policyholders through restrictions on the minimum capital position and on capital flows to the shareholder, Anbang.VIVAT scored ‘extremely strong’ in Fitch’s Prism factor-based capital model (Prism FBM) at end-2016 (end-2015: ‘very strong’). We expect VIVAT to maintain a Prism FBM score at or near the ‘extremely strong’ level.
An adverse change in our perception of the strength of the ring-fencing provided by the regulatory and governance framework under which VIVAT operates could lead to a downgrade.
Deteriorating Parent Credit Profile
Significant deterioration in Anbang's credit profile as assessed by Fitch could also lead to a downgrade of VIVAT's ratings.
Date ChangedThe ratings could be downgraded if VIVAT’s net income ROE falls below 3%, if the Prism FBM score falls to the low end of the 'strong' category, or if financial leverage increases to more than 35% for a sustained period.
Net income ROE sustained above 6% could lead to an upgrade. The rating could also be upgraded if financial leverage falls below 25% while the Prism FBM score is maintained at 'extremely strong'.
23-Aug-201611-Apr-201627-Jun-2017
The Navigator summarizes the main IFS rating(s) of the noted operating company, and/or operating company subsidiaries of the noted holding company.