Dutch Insurance Holdco Achmea B.V. Notes Assigned 'BBB-' And 'BB+' Ratings

Achmea B.V. is issuing perpetual subordinated notes that will be eligible as restricted tier 1 (RT1) capital under the EU's Solvency II regulations. At the same time, the company is issuing dated junior subordinated notes.
We are assigning our 'BB+' issue rating to the RT1 notes and our 'BBB-' issue rating to the junior subordinated notes.
We expect to classify both notes as having intermediate equity content.
FRANKFURT (S&P Global Ratings) Sept. 12, 2019--S&P Global Ratings today assigned its 'BB+' long-term issue rating to the RT1 notes and its 'BBB-' long-term issue rating to the callable junior subordinated notes to be issued by Dutch insurance holding company Achmea B.V. (BBB+/Stable/--). Both issue ratings are subject to our receipt and review of the notes' final terms and conditions.
The rating on the RT1 notes is three notches below the long-term issuer credit rating (ICR) on Achmea B.V., since we deduct from the ICR:
One notch to reflect the notes' subordination to the company's senior bonds;
One notch to reflect the risk of a potential temporary write-down of principal; and
One notch to reflect the notes' mandatory and unconditional optional interest-cancellation features.
The payment risk is in line with other hybrid instruments, because we believe the Achmea group's solvency capital requirement (SCR) coverage compares favorably with that of other insurance companies--we expect that it will remain above 190% over the next two years. Consequently, we consider the possibility of mandatory interest deferral to be more remote.
Our rating analysis and equity content assessment take into account our understanding that:
The noteholders are subordinated to senior creditors.
The issuer has unconditional discretion to cancel interest payments.
Interest cancellation is mandatory under certain circumstances, including if the solvency condition is not met; or if, under Solvency II, Achmea's capital resources (own funds) are insufficient to meet either the SCR or the minimum capital requirement; or upon insufficient distributable items.
The notes will be eligible as RT1 capital under Solvency II.
We understand that the RT1 notes are perpetual, but are callable at par after at least 10 years and every six months thereafter. The notes carry a fixed interest rate that will be reset on the first call date and on every five years thereafter. There is no step-up in the coupon rate if the notes are not called on the first call date. Achmea has the option to redeem the notes at par before the first call date under specific circumstances, such as for changes in tax, regulatory, or rating agency treatment. After any such early redemption, the notes must be replaced by an instrument of at least the same quality.
We rate the proposed long- term fixed-to-reset dated tier 2 notes two notches below the ICR based on our understanding that the noteholders will be subordinated to more senior creditors, coupons can be deferred, and our understanding of a remote payment risk following the stable solvency ratio. There is a step-up of 100 basis points in the coupon rate if the notes are not called on the first call date.
We take into account that Achmea has the option to defer interest if, during the previous six-month period, no dividend on any class of shares, or coupon payment on any junior or parity securities, has been declared. We understand that mandatory interest deferral applies if regulatory capital requirements or the solvency conditions of Achmea are breached, or if the regulator considers the regulatory capital ratio at risk.
We expect to classify both notes as having intermediate equity content, subject to our receipt and review of the final terms and conditions. Hybrid capital instruments with intermediate equity content can comprise up to 25% of total adjusted capital (TAC), which is the basis of our analysis of insurance companies' consolidated risk-based capital. Inclusion in TAC is also subject to the notes being eligible for regulatory solvency, regarding the amount, terms, and conditions.
We expect that Achmea will use the proceeds of the RT1 and tier 2 notes for the group's general corporate purposes, which may include the refinancing of outstanding debt.
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