Fitch Ratings has affirmed Nationale-Nederlanden Levensverzekeringen Maatschappij N.V.'s Insurer Financial Strength (IFS) Rating at 'AA-' (Very Strong) and NN Group N.V.'s (together NN) Long-Term Issuer Default Rating (IDR) at 'A+'.

The Outlooks are Stable.

The affirmation reflects NN's 'Very Strong' capitalisation and company profile as well as its 'Strong' profitability.

Key Rating Drivers

Very Strong Capital and Leverage: NN's capital remained very strong with a Solvency II (S2) ratio of 196% at end-1H22 (end-2021: 213%). The drop was due to higher interest rates and lower equity markets. NN maintained its Prism Factor-Based Model (Prism FBM) score at 'Extremely Strong' at end-2021 and Fitch expects NN to maintain very strong capital metrics in 2022.

NN's Fitch-calculated financial leverage ratio (FLR) remained at 23% at end-2021, despite the issue of EUR600 million of senior debt in November 2021. The relative increase in shareholders' equity, excluding unrealised gains on available-for-sale bonds, offset the debt increase. The FLR improved to 22% at end-1H22 as EUR600 million of senior debt matured in March 2022. We expect it to remain stable in 2H22.

Resilient Operating Performance: We assess NN's profitability as 'Strong' based on an improving trend in the group's operating earnings generation. Operating earnings rose to EUR2 billion (2020: EUR1.9 billion) in 2021. Pre-tax operating return on assets (ROA) improved to 1.3% (2020: 1.1%), and net income return on equity to 9% (2020: 6%). We expect the group to benefit from rising interest rates in 2022, while price increases in non-life should limit the negative impact of high inflation.

Very Strong Company Profile: Fitch ranks NN's company profile as 'Favourable' compared with other Dutch insurers. Recent acquisitions in the Netherlands have firmly established NN as the market leader in disability and accident insurance, and as the second-largest insurer in property and casualty, while securing its leading position in life and pensions. This is despite the sale of NN Investment Partners.

Focus on Established Lines: NN focuses on well-established insurance lines in both life and non-life insurance, which represent lower-than-average business risk than its main competitors. International operations, such as those in central Europe and Japan, accounted for about 46% of NN's gross written premiums in 2021.

Very Strong Financial Flexibility: NN's debt-servicing capability and financial flexibility is 'Very Strong' based on a three-year average fixed-charge coverage (FCC) of 13x, stable market access, and financial flexibility underpinned by adequate cash reserves and contingent funding. We expect rising interest rates to have no meaningful impact on FCC in 2022, which will remain very strong, as funding needs are limited and the group's operating earnings strong.

Low Investment Risk: Fitch assesses NN's investment and asset risk as low and scores the credit factor as 'Very Strong'. Investments mainly consist of investment-grade debt securities and high quality Dutch residential mortgages. NN has gradually optimised its investment portfolio by shifting to mortgages, loans and real estate, while reducing exposure to government bonds. The group's risky-asset ratio rose to 58% at end-2021 (end-2020: 45%), but we expect the exposure to riskier assets to remain commensurate with the ratings.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An improvement in NN's financial leverage to below 15%, while operating earnings remain strong, as reflected in a ROA of 1.3% or higher, and the group's S2 ratio remains above 200%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A deterioration of NN's financial leverage to above 30%.

A deterioration of NN's S2 ratio to below 170%.

A weakening of NN's operating earnings, as reflected in a ROA of 1% or below.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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