OREANDA-NEWS. Fitch Ratings has assigned NN Group N.V.'s (NN) core life insurance subsidiary an Insurer Financial Strength (IFS) rating of 'A+'. The agency has also assigned NN a Long-term Issuer Default Rating (IDR) of 'A'.

The Outlooks on the group's Long-term IDRs and IFS ratings are Stable. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS
The ratings are driven by the strong capitalisation of NN, its established market position in the Netherlands, geographical diversification and low investment risk. Low profitability and significant exposure to the challenging Dutch life sector are rating weaknesses.

Fitch views NN's consolidated group capitalisation as 'extremely strong', as measured by the agency's Prism Factor-Based Model (FBM) score at end-2015, and as being supportive of the ratings. NN holds significant cash balances at the holding company level, which it could use to support its operations if needed. The group's financial leverage, as calculated by Fitch, was 23% in 2015 (2014: 23%), which is consistent with the ratings. Fitch expects financial leverage to remain broadly stable.

NN has a strong market position in its home market, the Netherlands, combined with significant geographical diversification through operations in Europe and Japan. This is partly offset by pressures in the Dutch life sector, which is NN's main market.

The group's general account assets are predominantly invested in fixed interest instruments, largely rated 'A' or higher, with adequate diversification by region and issuer. Fitch estimates the group's risky-assets-to-equity ratio at 51%, a level that supports the ratings.

NN's profitability is weak for the rating level, despite net income return on equity (ROE) improving to approximately 8% in 2015 from 3% in 2014. Fitch expects ROE to stabilise at around current levels as the Dutch life unit returns to run-rate profitability, with further expense savings the likely source of normalised profit growth in the near term. Financial flexibility is supportive of the ratings, with NN's fixed-charge cover improving to 13x at end-2015 from 10x at end-2014.

NN's run-off book of variable-annuity (VA) business (end-2015: EUR10bn; end-2014: EUR13bn) in Japan includes embedded guarantees, which give rise to risks that are long-tailed and difficult to hedge and reserve for. However, Fitch views this risk as manageable, particularly in light of the group's capital strength, its hedging programme to mitigate financial market risks on the VA business, and a rapid run-off projection for the book.

RATING SENSITIVITIES
The ratings could be upgraded if, over a sustained period, financial leverage improves to below 20% or net income ROE rises to above 9%.

Conversely, the ratings could be downgraded if financial leverage rises above 30%, or net income ROE falls to below 5%.

The ratings could also be downgraded if capitalisation weakens significantly, as measured by a fall in the Prism FBM score to below 'very strong'.

FULL LIST OF RATING ACTIONS

Nationale-Nederlanden Levensverzekering Maatschappij N.V.
--IFS rating assigned at 'A+'; Outlook Stable

NN Group N.V.
--Long-term IDR assigned at 'A'; Outlook Stable
--Senior debt XS1204254715 assigned at 'A-'
--Subordinated debt XS0147306301 assigned at 'BBB'
--Subordinated debt XS1054522922 assigned at 'BBB'
--Subordinated debt XS1028950290 assigned at 'BBB'