Nationale Borg-Maatschappij N.V.

Nationale Borg-Maatschappij N.V.
Primary Credit Analyst:
Peter McClean, London (44) 20-7176-7075; [email protected]
Secondary Credit Analyst:
Marco Sindaco, London (44) 20-7176-7095; [email protected]
Table Of Contents
Rationale
Outlook
Base-Case Scenario
Company Description
Business Risk Profile
Financial Risk Profile
Other Assessments
Accounting Considerations
Related Criteria And Research
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SACP* Assessments
Anchor
a-
Business Risk
Satisfactory
Financial Risk
Strong
+
Modifiers
SACP*
0
ERM and
Management
0
Holistic
Analysis
0
=
Support
+
a-
Liquidity
Sovereign
Risk
0
0
Ratings
=
0
Group
Support
0
Gov't
Support
0
Financial Strength Rating
A-/Stable/--
*Stand-alone credit profile.
See Ratings Detail for a complete list of rated entities and ratings covered by this report.
Rationale
Business Risk Profile: Satisfactory
• Nationale Borg-Maatschappij N.V. (NB) is a long-standing, albeit small, provider of reinsurance capacity to the
global trade credit and surety markets and has a niche position in the Dutch and Belgian surety markets.
• Operating performance compares well historically with larger peers.
• The company's global credit and surety business is highly sensitive to shifts in global economies.
Financial Risk Profile: Strong
• Capital adequacy is a key strength for the rating and we would not expect to see it weakened by distributions to
shareholders.
• The small absolute size of capital leaves the company more exposed to volatility in its underwriting and
investments.
• There is some concentration risk-through bank deposits and fixed-income investments-to the financial services
sector.
Other Factors
We consider NB's subsidiary, Curaçao-based credit and surety reinsurer Nationale Borg Reinsurance N.V.(NBRe),
to be core to the NB group.
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Outlook: Stable
The stable outlook on NB reflects Standard & Poor's Ratings Services' view that the company's capital adequacy
provides a substantial buffer against a still-uncertain economic environment for its key lines of business. This
applies particularly to its inward reinsurance portfolio, for which NB retains the risks entirely on its balance sheet.
Consequently, we expect NB to maintain extremely strong capital adequacy.
Downside scenario
We might lower the ratings on NB if, contrary to our expectations:
Capital adequacy deteriorated below the 'AAA' rating category for a prolonged period. This could result from an
unexpectedly high return of capital to shareholders or a sharp increase in the frequency of claims in the inward
reinsurance book;
Earnings weakened to substantially less than our base-case assumptions, preventing the company from sustaining
capital capable of supporting the 'A-' rating during the next two years.
Upside scenario
We do not currently see any upside to the ratings.
Base-Case Scenario
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Macroeconomic Assumptions
• Growth in emerging markets will outpace growth in developed markets, albeit at a lower rate (see Table 1
below).
• Insurance penetration in emerging markets is growing.
Table 1
Standard & Poor's Real GDP Growth Scenarios For Selected Countries
--Baseline forecast-(%)
2013f
2014f
2015f
Germany
0.5
1.8
1.7
France
0.2
0.6
1.4
Italy
(1.8)
0.4
0.9
Spain
(1.2)
0.8
1.2
Netherlands
(1.2)
0.2
1.1
Belgium
(0.1)
0.8
1.5
Eurozone
(0.6)
0.9
1.3
U.K.
1.5
2.3
2.0
Switzerland
1.7
2.0
2.1
Australia
2.5
2.6
3.0
Brazil
0.9
2.0
2.5
Canada
1.7
1.9
2.5
China
7.6
7.4
7.2
India
4.8
6.0
6.3
Japan
1.8
1.4
1.2
Mexico
3.8
1.5
3.2
U.S.
2.2
2.3
3.1
f--Forecast.
Company-Specific Assumptions
• Although we anticipate a return of capital to shareholders, we still expect capital adequacy to remain extremely
strong.
• We expect gross premium to decline by about 3% in 2013, mainly due to a cutback in writings of Dutch surety
business, accompanied by stable volumes in inward reinsurance. For 2014, we expect premiums for the surety
business to rebound, driven by increases in premium rates, rather than exposures.
• The combined (loss and expense) ratio to weaken to about 95% in 2013, reflecting the €5 million net impact of
an abnormally large claim on the Dutch surety book. We expect the ratio to return closer to the five-year
average of about 90% in 2014-2015.
• Net income of about €7 million in 2013, of which approximately €2 million derived from investments.
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Key Metrics
2014F
2013F
2012
2011
2010
Gross premiums written (mil. €)
>93
>90
94.0
90.0
83.0
Net income (mil. €)
>9
>7
9.9
8.0
17.9
Return on shareholders' equity (%) >10
>9
12.1
9.8
21.9
P/C net combined ratio (%)
85-90
93-95
91.7
84.9
81.2
Net investment yield (%)
1.8
1.6
2.6
(1.0)
(5.5)
S&P capital adequacy
Extremely strong Extremely strong Extremely strong Strong Very strong
Company Description
Founded in 1893 and based in Amsterdam, NB writes direct surety insurance in the Dutch and Belgian markets and,
through NBRe, credit and surety reinsurance internationally. Egeria Capital B.V. and HAL Investments B.V. acquired
NB from ING Groep N.V. in July 2007.
NB posted gross premiums written (GPW) of €93.7 million in 2012, compared with €90.3 million in 2011. The group's
2012 GPW comprised 71% of assumed reinsurance, with the remaining 29% consisting of commercial guarantees and
purchase guarantees for private individuals. Nieuwegein-based Nationale Waarborg B.V., which NB acquired in
September 2008, underwrites the group's purchase guarantee business.
NB's Curaçao-based subsidiary NBRe underwrites the group's inward reinsurance business. This was previously
written by the parent, which continues to underwrite the group's direct surety business.
Business Risk Profile: Satisfactory
We regard NB's business risk profile as satisfactory, reflecting its position as a long-standing, albeit small, provider of
reinsurance capacity to the global trade credit and surety markets and its niche position in the Dutch and Belgian
surety markets. However, this specialization, together with the high sensitivity of global trade credit business to shifts
in global economies, constrains our overall view of NB's business risk.
Insurance industry and country risk
We believe NB faces intermediate industry and country risk. For the purposes of our analysis, we assume that,
notwithstanding the presence of its Dutch and Belgian surety business, in terms of risk exposure NB has greater
similarities to the global trade credit sector. We view country risk for this sector as low because exposures are globally
diversified and strongly weighted in wealthy and stable mature markets. Our intermediate view of industry risk
primarily reflects the sector's high volatility of loss ratios. The evolution of claims is highly correlated to trends in the
economic cycle. In addition, premiums are generally tied to clients' trade volumes, which decline in times of recession.
The combination of these elements results in significant swings in loss ratios, such as during the 2009 global recession,
in which we estimate the trade credit industry combined ratio deteriorated by about 40 points compared with pre-crisis
levels. On the other hand, the ability to capture and monitor credit quality data of many thousands of companies and
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the need to provide international coverage create very high operational barriers to entry in our view.
Competitive position
We consider that NB has an adequate competitive position. In our view, NB's proven expertise in the Dutch and
Belgian surety markets, in which we believe the group has built a strong reputation as a result of its tailored products,
underpins its competitive position. We also believe that NB has established a good position as a reputable provider of
credit and surety reinsurance capacity. This has enabled NB to diversify its revenue sources, both by business line and
through the geographical spread of the cedants' portfolios. However, notwithstanding this relative diversification, NB's
specialization as a surety insurer and credit and surety reinsurer constrains our view of its competitive position.
Surety-insurance business
NB's expertise, particularly in the midsize enterprise market, has translated into a defendable and stable market share
of 10% in the Dutch and Belgian guarantee market in recent years, defining NB as the largest nonbank player. The
group's main competitors are the national banks, which hold a market share of about 85% in the Netherlands and
Belgium, according to the group's estimate. In our opinion, the group has benefited from a low level of competition
from other insurers in these two markets. Its nonbank competitors are Euler Hermes Interborg and Ducroire
Delcredere. Given the nature of the surety business, diversification of exposures is difficult to achieve by sector.
Consequently, the construction, transport, logistics, and capital goods manufacturers industries represented a high
67% of surety premium income in 2012. The remaining exposure relates to custom bonds and the food and beverage
sector. We view positively NB's scaling back of surety exposures in the light of weakening economic conditions,
notably in the Netherlands. However, we expect to see tariff increases result in premium growth of about 10% for the
surety business in 2014.
Credit and surety reinsurance business
NB's reinsurance business is the largest contributor to the group's premium income with GPW of €66 million at
year-end 2012, representing a growth rate of over 10% compared with 2011. The group views its exposure to
international credit and surety markets as providing a stable and more diversified spread of risk than the
more-concentrated risks in its guarantee business. This exposure also supports the guarantee business by providing
market intelligence. Nevertheless, NB continues to be a follower player in this market as it has only a limited presence
in reinsurance treaties and is not able to influence pricing. Furthermore, we believe that the increasing weight of this
portfolio may lead to a shift in the competitive dynamics of the NB group over the medium term. However, we expect
to see a reversal of this trend in 2014, with a softening of premium rates leading to a stabilization of inward reinsurance
volumes.
Table 2
Competitive Position
--Year ended Dec. 31-(Mil. €)
Gross premiums written
Change in gross premiums written (%)
Net premiums written
Change in net premiums written (%)
Reinsurance utilization (%)
2012 2011 2010 2009 2008
93.7
90.4
83
70.6
65.2
3.7
8.8
17.7
8.2
3.0
78.0
74.6
66.6
56.3
51.8
4.5
12.1
18.1
8.9
4.6
16.8
17.5
19.8
20.1
20.7
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Table 2
Competitive Position (cont.)
Business Segment (% of GPW)
Surety
27.8
41.9
39.4
39.0
36.6
Reinsurance
72.2
58.1
60.6
61.0
63.4
Financial Risk Profile: Strong
We regard NB's financial risk profile as strong, particularly reflecting its extremely strong capital adequacy and good
profitability. However, the small absolute size of capital leaves the company more exposed to earnings volatility, while
there is some concentration risk to the financial services sector.
Capital and earnings
NB's capital position is a key strength for the rating. We regard capital and earnings as strong, and our base-case
scenario assumes that this will remain so. We expect that the company's good earnings and conscious policy of
managing exposures will sustain its extremely strong capital adequacy, but that NB will continue to return capital to its
shareholders. However, the small absolute size of capital leaves the company more exposed to volatility of
underwriting and investments.
Table 3
Capital
--Year ended Dec. 31-(Mil. €)
2012
Total capital (reported)
Change in total capital (reported) (%)
S&P capital adequacy
2011
2010
2009
2008
83.4
81.1
81.3
82.4
78.0
2.9
(0.4)
(1.3)
5.6
(1.8)
Extremely strong Strong Very strong Very strong Very strong
We assume in our base-case scenario a post-tax operating profit of €7 million in 2013, when we expect the combined
ratio to increase to about 95%, reflecting the €5 million net impact of an abnormally large claim on the Dutch surety
book. We expect the ratio to return closer to the five-year average of about 90% in 2014-2015, with post-tax operating
profit increasing to at least €9 million annually. We expect that inward reinsurance will continue to be the major
contributor to earnings. We believe that results for the surety book of business will benefit from tariff increases,
offsetting a softening market for the reinsurance book.
Table 4
Earnings
--Year ended Dec. 31-(Mil. €)
2012 2011 2010 2009 2008
Total revenues
79.7
75.3
66.8
61.5
55.9
EBIT adjusted
10.0
14.0
14.7
6.5
13.1
9.9
8.0
17.9
7.6
0.3
Return on shareholders' equity (reported)
12.1
9.8
21.9
9.5
0.4
P/C net expense ratio (%)
45.3
41.6
40.0
42.1
42.2
Net income
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Table 4
Earnings (cont.)
P/C net loss ratio (%)
46.4
43.3
41.2
50.2
43.4
P/C net combined ratio (%)
91.7
84.9
81.2
92.3
85.6
P/C return on revenue (%)
12.5
18.5
22.0
10.6
23.4
Risk position
In our view, NB has an intermediate risk position. The company's investment portfolio has a high percentage of cash,
while the bond portfolio is of very strong credit quality; 100% was invested in Dutch and German sovereign bonds
rated 'AA+' or higher at the end of the third quarter of 2013. Although there is a high (60%) concentration risk to the
financial services sector, this reflects the high level of bank deposits. Furthermore, the fact that the entities in which the
portfolio is concentrated consist largely of systemically important banks mitigates this risk.
Table 5
Risk Position
--Year ended Dec. 31-(Mil. €)
2012
2011
2010
2009
2008
Total invested assets
158 161.1 160.2 149.7 139.5
Net investment income
2.7
2.2
2.5
1.9
3.7
Net investment yield (%)
1.7
1.3
1.6
1.3
2.6
Net investment yield including realized capital gains/(losses) (%)
1.2
3.0
3.9
1.4
(4.9)
Net investment yield including all gains/(losses) (%)
2.6
(1.0)
5.5
4.3
(4.7)
Cash and short-term investments
60.8
60.6
58.0
64.0
81.2
Bonds
17.1
21.2
20.5
18.8
7.7
Equity investments
18.0
14.3
16.6
11.3
7.0
4.0
4.0
4.9
5.9
4.0
Investment Portfolio Composition (%)
Real estate
Financial flexibility
We consider NB's financial flexibility to be adequate. NB presently has limited capital needs from its planned organic
growth. Despite its strong profit generation, we view financial flexibility as only good because of NB's shareholding
structure, whereby net income is almost fully upstreamed to shareholders, and given its limited ability to raise
additional financing directly in the open market. However, the shareholders have indicated that they are willing to
supply additional capital in case of need.
Other Assessments
We regard NB's adequate enterprise risk management (ERM) and satisfactory management and governance as neutral
for our ratings.
Enterprise risk management: Adequate
We regard NB's ERM as adequate. We base our assessment on NB's adequate risk management culture and adequate
controls for most of its key risks: underwriting, claims handling, and reinsurance risks. We consider NB's ERM to be of
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low importance to its rating, owing to the group's somewhat small size and its high capitalization. In our opinion, the
recent appointment of a new chief financial officer/chief risk officer (CFO/CRO) is likely to raise the profile of ERM at
board level as well as enabling a more holistic approach to ERM.
Management and governance: Satisfactory
We consider NB's management and governance to be satisfactory. The company has a track record of strong
execution and generally conservative and reasonable financial management. The considerable expertise and
experience of the management team support the company's operational effectiveness.
The company has adjusted its strategy to reflect changes in market conditions, scaling back the previous strong growth
in its reinsurance business and at the same time applying tariff increases on its surety book, which it believes the
market can withstand. NB's focus on the bottom line means that standards for operational performance remain strong,
supported by the company's use of Economic Value Added (EVA) principles as a performance metric. However, we
believe that the small size of the company leaves it susceptible to the loss of key personnel, which may temporarily
affect its operations.
We have not identified any governance deficiencies in our assessment.
Liquidity: Strong
We consider NB's liquidity to be strong, owing to its solid available liquidity sources, mainly premium income, and an
asset portfolio that contains about €150 million in marketable securities. The company has some exposure to rating
triggers and subsequent requirements to place collateral, but we regard these as manageable. As regards liquidity
stress derived from an unexpectedly large claims payment, we believe the company's reinsurers would provide it with
funds at short notice, so protecting the company's liquidity position.
Accounting Considerations
The consolidated financial statements published by NB are prepared in accordance with International Financial
Reporting Standards (IFRS). In analyzing these accounts, we have shown shareholder funds net of dividends paid.
Since 2007, in compliance with IFRS, NB has consolidated NBRe.
Our analysis of risk-based capital is consistent with our published criteria for credit and surety insurance. Accordingly,
we have calculated required capital based on the gross loss over gross exposure method, whereby the highest gross
loss over 10 years is compared with gross exposure over the same period. The highest ratio over this period is then
used to derive the 'BBB' level of required capital based on the current net exposure. Required capital is scaled upward
for higher rating levels.
Related Criteria And Research
Related Criteria
• Trade Credit Insurance Capital Requirements Under Standard & Poor’s Capital Adequacy Model, Dec. 6, 2013
• Group Rating Methodology, Nov. 19, 2013
• Insurers: Rating Methodology, May 7, 2013
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•
•
•
•
Enterprise Risk Management, May 7, 2013
Management and Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
Principles Of Credit Ratings, Feb. 16, 2011
Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance
Capital Model, June 7, 2010
Related Research
• Standard & Poor’s Assigns Insurance Industry And Country Risk Assessments, May 7, 2013
Note: Nationale Borg-Maatschappij N.V. is domiciled in The Netherlands. Nationale Borg-Reinsurance N.V. is
domiciled in Curacao.
Ratings Detail (As Of January 30, 2014)
Operating Companies Covered By This Report
Nationale Borg-Maatschappij N.V.
Financial Strength Rating
Local Currency
A-/Stable/--
Counterparty Credit Rating
Local Currency
A-/Stable/--
Nationale Borg Reinsurance N.V.
Financial Strength Rating
Local Currency
A-/Stable/--
Counterparty Credit Rating
Local Currency
Domicile
A-/Stable/-Netherlands
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable
across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
Additional Contact:
Insurance Ratings Europe; [email protected]
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