S&P Affirms Eureko’s ‘A+’ Ratings; Off CreditWatch

Standard & Poor’s Ratings Services announced that it has removed from CreditWatch and affirmed its ‘A+’ long-term counterparty credit and insurer financial strength ratings on the core operating entities of the Netherlands-based Eureko insurance group.

In a related move the rating agency also affirmed its ‘A/A-1’ counterparty credit ratings on Achmea Hypotheekbank N.V. (AHB) and removed them from CreditWatch with a stable outlook. AHB forms the major part (and the mortgage component) of the banking operations of the insurance-dominated Achmea group, which is part of Eureko. “The ratings on AHB therefore reflect its position in, and relationship with, the Achmea group, and the fact that Standard & Poor’s considers AHB to be a strategically important subsidiary,” stated S&P Credit Analyst Oliver Judd.

S&P also announced that it has “removed from CreditWatch and affirmed its ‘BBB+’ long-term counterparty credit and senior unsecured debt ratings on Eureko’s holding companies — Eureko B.V. and Achmea Holding N.V. — and its ‘A-2’ short-term counterparty credit and commercial paper ratings on Achmea Holding N.V.,” with a stable outlook on all the entities.

“The rating affirmations follow the completion of Eureko’s sale of its Portugal-based insurance subgroup Seguros e Pensoes (SeP; operating entities are rated BBB+/Negative/–) to Banco Comercial Portugues, S.A. (BCP; A-/Negative/A-2),” stated S&P credit analyst Tatiana Grineva. She cautioned that the sale is still, subject to regulatory approval, which is expected at the end of March, and that the ratings were based on the assumption that Eureko will gain such approval. “Failure to do so will lead to a review of all ratings, resulting most likely in a downgrade,” Grineva indicated.

“The ratings,” said the report, “reflect Eureko’s strong business position, strong capitalization, and improving underwriting performance, as well as the continuing commitment of its shareholders to provide capital resources. Offsetting this is Eureko’s failure to maintain interest coverage in line with the current ratings as a result of unrealized investment losses, which, combined with the current level of leverage, are restricting Eureko’s financial flexibility — that is, its ability to source capital relative to capital requirements.”

S&P also noted that “The continued downward trend in the capital markets, uncertainty with respect to Eureko’s planned IPO, and the acquisition of the majority stake in Poland-based insurance group PZU are also negative factors for the ratings.”

“Eureko’s business position remains strong despite the spin-off of SeP,” said the report, citing its leading position in The Netherlands, Greece, Ireland, and Slovakia. The company also maintains a “very well balanced and diverse portfolio of business, which includes: life (38% of 2003 pro forma profit before tax); non-life (20%); health insurance (20%); asset management (14%); and banking activities (8%).” However, the retreat from the Portuguese market led S&P to conclude that Eureko can no longer be viewed as a Pan-European insurer, and that its business position is “unlikely to be further improved without an acquisition of significance.”

“The deconsolidation of SeP is viewed very positively for Eureko’s capitalization levels,” Grineva stated. “The operations of SeP, which needed ongoing capital injections, had been a drag on Eureko’s capital levels and a restraining factor for the group’s financial flexibility since its acquisition in 2001. Since the divestment of SeP, Eureko’s capital adequacy is strong, with a pro forma capital adequacy ratio of 131% as measured by S&P’s risk-based capital model. “This appears sufficient to support marginal organic growth and to keep the group comfortably within the current rating level in the medium term. Furthermore, Eureko’s capitalization may further improve if the IPO planned for 2003 is successfully completed, although no credit for this has been given in Standard & Poor’s analysis.”

S&P cautioned, however that the “current economic climate increases the uncertainties surrounding management’s stated intention of raising new capital through a listing of Eureko’s shares by means of an IPO.” The uncertainty is due to Eureko’s ongoing dispute with the Polish government over the terms for acquiring a majority stake in PZU, the country’s largest insurer. S&P indicated that the IPO might be “of pivotal importance for the acquisition,” if Eureko is successful in its currently pending arbitration procedure against the Polish government.

“Capitalization is expected to remain consistent with the ratings level, and it is expected that shareholders will continue to provide financial support if such a need should arise. Standard & Poor’s has not factored future acquisitions of significance into its analysis of Eureko,” the report concluded.