Credit Opinion: AG Insurance

Transcription

1 Credit Opinion: AG Insurance Global Credit Research - 27 Nov 2015 Belgium Ratings Category Rating Outlook Insurance Financial Strength Moody's Rating STA A2 Contacts Analyst Phone Antonello Aquino/London Laura Perez Martinez/London Simon Harris/London Key Indicators AG Insurance[1][2] As Reported (Euro Millions) Total Assets 74,260 67,432 66,956 60,112 59,379 Total Shareholders' Equity 6,488 5,025 5,429 3,302 3,641 Net income (loss) attributable to common shareholders' (430) 355 Gross Premiums Written 5,444 5,394 6,403 5,934 6,120 Life Insurance Gross Premiums Written Property & Casualty Insurance Gross Premiums Written Net Premiums Written 5,367 5,323 6,346 5,869 6,065 Moody's Adjusted Ratios High Risk Assets % Shareholders' Equity 95.6% 108.7% 89.5% 164.0% 153.1% Reinsurance Recoverable % Shareholders' Equity 4.1% 3.9% 3.6% 21.0% 19.7% Goodwill & Intangibles % Shareholders' Equity [3] 19.5% 22.6% 20.7% 24.5% 22.5% Shareholders' Equity % Total Assets 8% 7% 7% 5% 5% Return on avg. Capital (1 yr. avg ROC) 6.1% 5.8% Sharpe Ratio of ROC (5 yr. avg) Adv./(Fav.) Loss Dev. % Beg. Reserves (1 yr. avg) Financial Leverage [3] 25.2% 25.0% 24.8% 27.6% 26.5% Total Leverage [3] 37.9% 39.9% 38.3% 44.8% 42.7% Earnings Coverage (1 yr.) [3] 7.6x 6.6x 6.7x -1.9x 1.5x [1] Information based on IFRS financial statements as of Fiscal YE December 31 [2] Certain items may have been relabeled and/or reclassified for global consistency [3] Information based on IFRS financial statements of Ageas SA/NV as of Fiscal YE December 31 Opinion SUMMARY RATING RATIONALE Moody's A2 insurance financial strength rating on AG Insurance (formerly Fortis Insurance Belgium) reflects the

2 company's leading market position in Belgium, its diversified business profile as well as its good capitalisation which means that the company would be resilient to potential stresses on its assets and its liabilities. These strengths are partly offset by a reliance on third party distribution channels and some constraints on profitability, especially in the non-life segment where competition pressures could limit further improvements in the combined ratio. High guarantees granted in life policies will also limit the company's financial margins, although we expect AG Insurance to be able to cope with the low interest rate environment notably thanks to its good asset liability management, with a low duration gap limiting the reinvestment risk. AG Insurance is the leading insurance company in Belgium with a 21% market share in 2014 according to Assuralia, the association of Belgian insurance companies. The business mix of the company consists of property and casualty (32%) and life and savings (68%) based on 2014 premiums. The products are mostly sold through brokers and BNP Paribas Fortis network. Since May 2009, BNP Paribas Fortis, a subsidiary of the BNP Paribas Group, holds 25% shareholding in AG Insurance, next to Ageas Group which retained a controlling 75% stake in the company via Ageas Insurance International N.V., the holding company for all Ageas Group's insurance operations. Credit Strengths Credit strengths of AG Insurance are: - Strong market position and relative market shares in Belgium in both life (number 1) and non-life (number 2) markets - Diversified business risk profile with a good diversification between life and non-life activities and a diversified distribution strategy - Good level of capitalisation to absorb potential stresses on assets and liabilities Credit Challenges Credit challenges of AG Insurance are: - Maintaining market share in the context of a mature and competitive Belgian market and in a period when the company is increasing its P&C tariffs and is constrained on the rates offered to life policyholders - Maintaining the current ALM discipline to manage the interest rate risk, especially the reinvestment risk in the current low interest rate environment, while maintaining a good asset quality Rating Outlook AG Insurance IFSR carries a stable outlook. What to watch for: - Non-life combined ratios - Life sales and margins - Increase in investment risk What Could Change the Rating - Up The following factor could put upward pressure on the rating: - Material improvement in the profitability with a normalised return on capital above 8% - A significant improvement in capitalisation and financial flexibility What Could Change the Rating - Down The following factors could put downward pressure on the rating: - Deterioration in profitability with a normalised return on capital below 4%

3 - Significant deterioration in capitalisation - Deterioration in financial leverage metrics beyond Moody's expectations for A-rated insurers - Significant deterioration in asset quality DETAILED RATING CONSIDERATIONS Moody's rates AG Insurance A2 for insurance financial strength, which is in line with the rating indicated by Moody's insurance financial strength rating scorecard. Insurance Financial Strength Rating The key factors currently influencing the rating and outlook are: MARKET POSITION AND BRAND: Aa - SUSTAINED LEADERSHIP AND FRANCHISE AG Insurance is the leading insurance franchise in Belgium, ranking number one in life and number two in non-life. Despite the challenging period experienced by the Ageas Group in 2008 and 2009, AG Insurance has maintained this leading position, demonstrating its franchise stability. Furthermore, the exclusive distribution agreement concluded until 2020 between AG Insurance and BNP Paribas Fortis, the largest bank in Belgium, enables the insurance company to maintain access to a very large client base, especially in the retail life segment, although as in many European markets, competition between banking savings and insurance savings products is increasing. DISTRIBUTION: Baa - PREDOMINANTLY THROUGH INDEPENDENT CHANNELS Bancassurance is the largest source of sales of AG Insurance but the company also maintains significant alternative distribution capacity including independent brokers and direct sales (especially in the employee benefits segment). An agreement with BNP Paribas confirmed the exclusive distribution relationship with BNP Paribas Fortis until Moody's considers AG Insurance's control of this distribution channel to be low, since both entities do not belong to the same group. The high weight of sales through brokers also contributes to a relatively low control of the distribution strategy, notwithstanding the preferred position with brokers that the company has been able to maintain. Therefore, Moody's currently considers AG Insurance's distribution strategy to be more consistent with a Baa-rating. PRODUCT RISK AND DIVERSIFICATION: A - BENEFITTING FROM A GOOD DIVERSIFICATION, OFFSET BY RELATIVELY HIGH PRODUCT RISK IN LIFE AG Insurance's portfolio is well-diversified with a 68%/32% split between life and non-life business based on 2014 gross written premiums. In addition, the company's non-life book shows a relatively low risk profile as the majority of the P&C business comes from short- and medium-tailed lines. Nonetheless, Moody's notes that AG Insurance is also exposed to workmen's compensation insurance, a long-tailed line of business. Furthermore, AG Insurance's life book shows a relatively high risk profile, given the high proportion of traditional life reserves, which historically include high options and guarantees in the Belgian market. Although the guarantees in the new production have been reduced significantly in the past three years (new business guaranteed interest rate in Individual Life reduced to 1.0% as of September 2014), and the company built a Low Interest Rate Reserve to finance part of the high guarantees granted in the past, the average guaranteed interest rate on the existing book remains at around 2.7% at half-year More positively, A/L duration gap has further decreased to 0.06 as at November The company has been trying to reduce life product risk by increasing the proportion of unit-linked products, albeit unit-linked sales decreased in 2014, with the trend continuing during the first half of 2015, due to lower demand for these products. Adversely, sales of guaranteed products marginally increased, representing 90% of total life sales in 2014 (YE13: 86%). ASSET QUALITY: A - GOOD ASSET QUALITY The quality of the assets is good supported by the low level of reinsurance recoverable and relatively low level of goodwill and intangibles on balance sheet, both at AG Insurance level and at Ageas group level. The exposure to high risk assets as a percentage of shareholders' equity as at YE2014 slightly decreased to 95.6% from 108.7% at YE2013, with the increase in certain investments, such as equity and real estate, more than offset by the increase in shareholders' equity. The average quality of the fixed income portfolio, which represents around 77% of the

4 investment portfolio, remains strong (85% of debt securities rated A or above). CAPITAL ADEQUACY: A - GOOD LEVEL OF CAPITALISATION Moody's continues to view AG Insurance's capitalisation as robust and consistent with the risk profile of the company. The regulatory solvency ratio of AG Insurance was good at 215% as at HY15 (YE2014: 189%, YE2013: 183%). On a more economic basis, the company reported strong solvency II ratio under the standard formula at 252% as at HY15 (YE14: 243%). Moody's believes that AG Insurance level of capital confers AG Insurance with a good resilience to further stress in the financial markets and represents a good buffer to absorb liabilities shocks. PROFITABILITY: A - CONSTRAINED PROFITABILITY BOTH IN P&C AND LIFE In the non-life segment, the company reported EUR89 million operating result in 2014 (EUR108 million in 2013) with a combined ratio of 101.2% (99.9% in 2013). This deterioration was due to adverse weather events (e.g. the June hailstorms had a negative impact of 2.8% on the combined ratio), as well as weak performance in third-party liability business line. However, the company has taken actions to improve operating performance by implementing tariff increases and revising its underwriting policy. In HY15, operating result significantly improved to EUR 99 million (HY14: EUR 0.5 million), reflecting the more benign weather conditions compared to the previous period well as a positive development on prior year claims. The company reported a combined ratio of 94.6% at HY15 (HY14: 105.7%). In the life segment, the operating result was fairly stable year on year at EUR431 million in 2014 (vs. EUR 433 million in 2013) although Moody's believes that the company's financial margin will remain limited in the current low interest rate environment. The life operating margin was low at 0.87% in 2014, slightly down from 0.89% in 2013, mainly due to weak underwriting result, following a EUR33 million provision related to future expenses of guaranteed products, partly offset by higher realised capital gains. During the first half of 2015 the operating result declined by 13.3% to EUR208 million, reflecting lower capital gains and adverse mortality that impacted the result of the guaranteed business. Moody's expects AG Insurance to be able to cope with the low interest rate environment and to manage its exposure to high guarantees granted in life policies in the past thanks to (1) discipline in providing new guarantees, as evidenced by the decreasing trend in guarantees, (2) reduced returns to policyholders on policies including profit-sharing mechanisms and (3) improved asset liability management, with notably a low duration gap (the duration of AL was small at 0.06 as at November 2014) limiting the reinvestment risk. LIQUIDITY AND ALM: A - IMPROVED ALM DISCIPLINE Notwithstanding the substantial level of liquid assets within the company, Moody's views AG Insurance's liquidity and ALM as consistent with a A-rating. Because of the high guarantees granted to policyholders in the past, Moody's believes that the company is intrinsically exposed to a decrease in interest rate. Nonetheless, AG Insurance has managed this risk thanks to the building a Low Interest Rate Reserve for past guarantees and thanks to a reduction of the duration gap which should from now on limit the negative impacts of prolonged low rates. The company is also exposed to an increase in interest rate which could impact the market value of the fixed income portfolio and create a liquidity shock for the company, although some high guarantees and surrender penalties mechanisms currently limit this risk. RESERVE ADEQUACY: A - SOME EXPOSURE TO LONG-TAIL RISK In the context of the relatively short-tailed nature of the non-life insurance businesses, AG Insurance has shown favourable reserve development on average over the last five years. Nonetheless, the company remains exposed to some long-tail lines such as workmen's compensation and motor bodily injury. FINANCIAL FLEXIBILITY: Baa - ADEQUATE FINANCIAL FLEXIBILITY Adjusted financial leverage for Ageas SA/NV was good at around 25% in 2014 (2013: 25%) but total leverage, excluding hybrids' equity credit and including operational debts, is significantly higher at 38% in 2014 (2013: 40%). Our leverage calculations include a financial liability related to a put option that Ageas granted to BNP Paribas Fortis on the 25% stake in AG Insurance that BNP Paribas Fortis owns (option to sell this stake to Ageas in the six month period starting 1 January, 2018). Excluding this put option the financial leverage ratio amounts to 18%

5 (from the 25% including this liability) and the total leverage to 32% (from 38% including this liability) at YE14. Please refer to Ageas SA/NV Credit Opinion for more details on the Group's financial flexibility. AG Insurance had senior debt of EUR0.8 billion mostly secured to property, EUR0.3 billion of hybrid debt on lent from Ageas (Hybrone I), EUR0.45 billion of external hybrid debt and EUR0.45 billion of hybrid debt issued to Ageas Group and BNP Paribas and EUR6.5 billion of shareholders' equity as at YE2014. We expect the company's financial leverage and earnings coverage metrics to remain consistent with AG Insurance's rating level in the medium term. Furthermore, although the financial flexibility of the Ageas Group may be influenced by the litigation risk that the holding company is facing, AG Insurance's issuance of external hybrid debt for EUR400 million in March 2015 demonstrates that the operating company maintains an adequate access to capital markets. AG Insurance will predominantly use the proceeds from this issuance to redeem the outstanding Hybrone securities, subject to market conditions, with the remaining of the proceeds to be used for general corporate purposes. Rating Factors AG Insurance[1][2] Financial Strength Rating Scorecard Aaa Aa A Baa Ba B Caa Score Adjusted Score Business Profile Aa A Market Position and Brand (20%) Aaa Aa - Relative Market Share Ratio X Distribution (5%) Baa Baa - Distribution Control X - Diversity of Distribution X Product Focus and Diversification (10%) Baa A - Product Risk - P&C X - Product Risk - Life X - Product Diversification X - Geographic Diversification X Financial Profile A A Asset Quality (10%) Aa A - High Risk Assets % Shareholders' Equity 95.6% - Reinsurance Recoverable % Shareholders' 4.1% Equity - Goodwill & Intangibles % Shareholders' 19.5% Equity [3] Capital Adequacy (15%) Aa A - Shareholders' Equity % Total Assets 8% Profitability (15%) Baa A - Return on Capital (5 yr. avg) X - Sharpe Ratio of ROC (5 yr. avg) X Liquidity and Asset/Liability Management (5%) A A - Liquid Assets % Liquid Liabilities X Reserve Adequacy (5%) Aa A - Adv./(Fav.) Loss Dev. % Beg. Reserves (5 X yr. wtd avg) Financial Flexibility (15%) A Baa - Financial Leverage [3] 25.2% - Total Leverage [3] 37.9% 4.1x

6 - Earnings Coverage (5 yr. avg) [3] 4.1x Operating Envrionment Aaa - Aaa - A A Aggregate Profile A1 A2 [1] Information based on IFRS financial statements as of Fiscal YE December 31 [2] The Scorecard rating is an important component of the company's published rating, reflecting the stand-alone financial strength before other considerations (discussed above) are incorporated into the analysis [3] Information based on IFRS financial statements of Ageas SA/NV as of Fiscal YE December 31 This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained

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