S&P: ASR Nederland And Core Subsidiaries Ratings Affirmed; Outlook Stable
We also affirmed the ratings on all outstanding hybrid instruments (see list below).
The affirmation reflects our view of the group's ongoing strong business and financial risk profiles and the resilience of its balance sheet amid suboptimal underwriting conditions in a low-interest-rate environment.
Under our criteria, we combine our business and financial risk profile assessments to derive an anchor of 'a' or 'a-'. We select the higher of the two to derive our ratings on ASR, reflecting our view that its balance sheet retains a sufficient capital cushion.
We have revised our assessment of the multi-line insurer's overall industry and country risk assessment (IICRA) to intermediate from low. This reflects our change in IICRA for the Dutch health insurance sector to intermediate from low, due to aggressive competition and a business model that is highly sensitive to political decisions (see "Dutch Health Insurance Sector Carries An Intermediate Industry And Country Risk Assessment," published April 15, 2015, on RatingsDirect). We also consider the Dutch life sector to have an intermediate IICRA, reflecting pressures from low interest rates and declining market prospects. While the Dutch non-life sector carries a low IICRA, ASR's combined life and health premiums form over half the total premiums and lead to an overall intermediate industry risk profile.
ASR's operating earnings have improved year-on-year since 2011. Earnings in 2015 of €601 million exceeded our expectation of €330 million. This leap was primarily due to improved operating earnings, as well as exceptional earnings on equity investments and realized gains on property. We now forecast earnings at normalized levels of around €400 million annually in 2016-2018. This is based on our expectation that the non-life combined ratio will not exceed 100%, according to our calculations, combined with a strong profit stream from life operations. Although ASR has recently underwritten unprofitable defined benefit pension business, which could mean weaker earnings and higher risks, we expect any negative effects to remain limited as ASR will have scaled down this business by about end-2016 in favor of defined contribution business.
We therefore continue to assess ASR's capital and earnings as very strong in 2016-2018. We expect quite limited growth in capital requirements stemming from flat organic growth in the non-life segment and a continuing premium decline in the life segment (excluding acquisitions) in line with the trend in the Dutch market. We expect that ASR will maintain its current asset risk profile and that growth in earnings will cover capital requirements. Both factors support our capital and earnings assessment.
In 2015, ASR completed two acquisitions--AXENT (No. 3 in the Dutch market funeral insurer) and De Eendragt (No. 7 in the Dutch market pension insurer)--thereby increasing total invested assets by about €3.6 billion and gross premiums written by about €100 million, which we viewed neutrally overall for the group's competitive position and financial risk profile. Our base-case scenario is that ASR will continue to add small bolt-on acquisitions to improve diversification in its portfolio and underpin growth, and these acquisitions will not materially change the risk profile of the group. Should the risk profile alter as the result of accumulation of small bolt-on acquisitions, we may revise our assessment of capital and earnings downward.
The successful IPO in June 2016 of 36.3% of the Dutch government's holdings in ASR could, in the future, add an additional source of financial flexibility on top of proven access to debt markets. The IPO has also strengthened our view that government ownership is temporary and expect ASR to be fully privatized in the next 12-24 months.
The stable outlook reflects our expectation that ASR will maintain its strong competitive position and very strong capital adequacy (in the 'AA' range) over the next 12-24 months, supported by stable earnings with net income of about €400 million annually in 2016-2018; net combined ratio below 100% (based on S&P Global Ratings' calculations), which will preserve a healthy capacity to service its debt costs amid suboptimal underwriting conditions in a low-interest-rate environment; and a rational dividend policy.
We could lower the ratings if: We revised our capital and earnings assessment to strong from very strong if capital adequacy is not maintained at the very strong level; orASR's profitability is not in line with our expectations. This could be the case if the property/casualty combined ratio is above 102%, new business value remains negative, or net income falls sustainably below €400 million annually in 2016-2018; orFixed-charge coverage ratios fall below 4x.
We consider it unlikely that we will raise the ratings over the next 12-24 months. Nevertheless, we could raise them if we saw a material reduction in ASR's investment risk profile and a materially stronger-than-expected improvement in capital adequacy sustainably into the 'AAA' range.
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