Nationale Borg Group

Primary Credit Analyst:

Peter McClean, London (44) 20-7176-7075; [email protected] Secondary Contact:

Marco Sindaco, London (44) 20-7176-7073; [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

SACP* Assessments SACP* Support Ratings

Anchor

a-Business Risk

Satisfactory

Financial Risk

Strong

+

ERM and

Management 0

Holistic

Analysis 0

=

a-Liquidity 0

Sovereign

Risk 0

+

Group

Support 0

Gov't

Support 0

=

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 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 and has benefited from a benign claims environment in 2014.

• The company's global trade credit business is highly sensitive to shifts in global economies, which are only slowly recovering.

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., to be core to the NB group.

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 slowly recovering 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 Nationale Borg if, contrary to our expectations:

• Capital adequacy deteriorates 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; or

• Earnings weaken to substantially below 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 potential for a positive rating action.

Base-Case Scenario

• In our view, our expectation of a gradual recovery of economic growth in 2014 is positive for trade credit insurers.

• Global trade credit insurers could be negatively affected if a global economic recovery fails to materialize.

• Higher growth in emerging economies than developed markets, which we forecast for 2014-2015, will likely lead to a gradual rise in exposure to emerging markets (see table 1 below).

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 5% in 2014, mainly due to soft market conditions in the inwards reinsurance business, accompanied by stable volumes in the Dutch surety business. For 2015, we expect premium growth of around 5% in both major business areas.

• The combined (loss and expense) ratio to improve to below 80% in 2014, mainly reflecting an abnormally benign claims experience across all parts of the business. We expect the ratio to return closer to the five-year average of about 90% in 2015-2016.

Key Metrics Table 1

2015F 2014F 2013 2012 2011

Gross premiums written (Mil. €) 92 88 93 94 90

Net income (Mil. €) 10 16 8.8 9.9 8.0

Return on shareholders' equity (%) 10 18 10.5 12.1 9.8

P/C net combined ratio (%) 88-90 78-80 93.0 91.7 84.9

Net investment yield (%) 2.5 2.5 3.4 2.6 (1.0)

S&P capital adequacy Extremely strong Extremely strong Extremely strong Extremely strong Strong F--Forecast. P/C--Property/casualty.

Company Description

Founded in 1893 and based in Amsterdam, NB writes direct surety insurance in the Dutch and Belgian markets and, through Curaçao-based subsidiary Nationale Borg Reinsurance (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 €92.9 million in 2013, virtually unchanged from the €93.6 million recorded in 2012. The group's 2013 GPW comprised 74% (2012: 71%) of assumed reinsurance, with the remaining 26% 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.

Nationale Borg Reinsurance (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 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. We believe pricing discipline at the major trade credit insurers has improved since the 2008 global financial crisis. We therefore would not expect to change our assessment of intermediate industry and country risk over 2014-2015.

Insurance industry and country risk: Intermediate

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 and 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 assessment of industry risk reflects our view of five industry-related factors. We see profitability (measured by the combined ratio and return on

equity), market growth prospects, and the institutional framework as neutral, product risk as negative, and barriers to entry as positive. A reassessment of industry risk would arise from potential changes in our view of the sector's profitability and growth prospects.

Table 2

Industry And Country Risk

Insurance sector IICRA Business mix (%) Global trade credit Intermediate 100

IICRA--Insurance Industry Country Risk Assessment.

Competitive position: Adequate

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.

Table 3

Nationale Borg-Maatschappij N.V. Competitive Position

--Year ended Dec.

31--(Mil.€ ) 2013 2012 2011 2010 2009

Gross premiums written 92.9 93.7 90.4 83.0 70.6 Change in gross premiums written (%) (0.8) 3.7 8.8 17.7 8.2

Net premiums written 79.0 78.0 74.6 66.6 56.3

Change in net premiums written (%) 1.4 4.5 12.1 18.1 8.9 Reinsurance utilization (%) 15.0 16.8 17.5 19.8 20.1 Business segment (% of GPW)

Surety 26.2 27.8 41.9 39.4 48.1

Reinsurance 73.7 72.2 58.1 60.6 51.9

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 2013. The remaining exposure relates to custom bonds and the food and beverage sector. We view positively NB's continuing scaling back of surety exposures in the light of weakening economic conditions, notably in the Netherlands construction sector. Primarily for this reason, we expect premium growth for the surety business to be stable or marginally negative in 2014, with an improvement in economic conditions in the

Netherlands leading to an increase in GPW of around 5% in 2015.

Credit and surety reinsurance business

NB's reinsurance business is the largest contributor to the group's premium income with GPW of €68 million at year-end 2013, representing some 74% of the total. 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. The soft market conditions in the sector have contributed to a 5% fall in NB's reinsurance business as of the third quarter of 2014, stemming the previously increasing weight of this portfolio as a proportion of the total. We expect to see a slight recovery of around 5% in premium growth in 2015.

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: Strong

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 the case. 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 group is more exposed to volatility of underwriting and investments because of the small absolute size of its capital.

Table 4

Nationale Borg-Maatschappij N.V. Capital

--Year ended Dec.

31--(Mil. €) 2013 2012 2011 2010 2009

Total capital (reported) 85.2 83.4 81.1 81.3 82.4

Change in total capital (reported) (%) 2.1 2.9 (0.4) (1.3) 5.6 S&P capital adequacy Extremely strong Extremely strong Strong Very strong Very strong

We assume in our base-case scenario a post-tax operating profit of over €16 million in 2014, when we expect the combined ratio to improve significantly to below 80%, mainly reflecting an abnormally benign claims experience across all parts of the business. We expect the ratio to return closer to the five-year average of about 90% in 2015-2016, with post-tax operating profit of about €10 million per year. We expect that inward reinsurance will continue to be the major contributor to earnings, despite the soft reinsurance market conditions.

Table 5

Nationale Borg-Maatschappij N.V. Earnings

--Year ended Dec.

31--(Mil. €) 2013 2012 2011 2010 2009

Total revenues 82.3 79.7 75.3 66.8 61.5

EBIT adjusted 7.8 10.0 14.0 14.7 6.5

Net income 8.8 9.9 8.0 17.9 7.6

Return on shareholders' equity (reported) (%) 10.5 12.1 9.8 21.9 9.5 P/C: Net expense ratio (%) 43.5 45.3 41.6 40.0 42.1 P/C: Net loss ratio (%) 49.5 46.4 43.3 41.2 50.2 P/C: Net combined ratio (%) 93.0 91.7 84.9 81.2 92.3 P/C: Return on revenue (%) 9.4 12.5 18.5 22.0 10.6 P/C--Property/casualty.

Risk position: Intermediate

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 2014. Although there is a high (62%) concentration risk to the financial services sector, this reflects the high level of bank deposits. Furthermore, mitigating this risk is the fact that the entities in which the portfolio is concentrated consist largely of systemically important banks.

Table 6

Nationale Borg-Maatschappij N.V. Risk Position

--Year ended Dec.

31--(Mil. €) 2013 2012 2011 2010 2009

Total invested assets 149.4 158.0 161.1 160.2 149.7

Net investment income 2.1 2.7 2.2 2.5 1.9

Net investment yield (%) 1.4 1.7 1.3 1.6 1.3

Net investment yield including realized capital gains/(losses) (%) 1.9 1.2 3.0 3.9 1.4 Net investment yield including all gains/(losses) (%) 3.4 2.6 1.0 5.5 4.3 Investment portfolio composition (%)

Cash and short-term investments 59.0 60.8 60.6 58.0 64.0

Bonds 15.8 17.1 21.2 20.5 18.8

Equity investments 20.9 18.0 14.3 16.6 11.3

Real estate 4.3 4.0 4.0 4.9 5.9

Financial flexibility: Adequate

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 (subject to maintaining NB's required level of capitalization), and given its limited ability to raise additional financing 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 consider NB's ERM to be 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 view positively the improvements in NB's capital modelling capabilities over the past year. We consider NB's ERM to be of low

importance to its rating, owing to the group's somewhat small size and its high capitalization.

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, as demonstrated by its scaling back of the previous strong growth in its reinsurance business. NB's focus on the bottom line means that standards for operational performance remain strong, supported by the group'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 Nationale Borg's liquidity to be strong, owing to its solid available liquidity sources, mainly premium income, and an asset portfolio that contains about €157 million in marketable securities. The company has some exposure to rating triggers and subsequent requirements to place collateral, but we regard these as manageable. With regard to liquidity stress derived from an unexpectedly large claims payment, we believe the group's reinsurers would provide it with funds at short notice, therefore protecting the group'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

• 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

• Enterprise Risk Management, May 7, 2013

• Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012

• Use Of CreditWatch And Outlooks, Sept. 14, 2009

• Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010

Related Research

• Global Trade Credit Insurance Sector Carries Intermediate Industry And Country Risk, April 25, 2014 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 22, 2015) 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/--Issuer Credit Rating

Local Currency

A-/Stable/--Domicile 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.

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