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FINANCIAL INSTITUTIONS
CREDIT OPINION20 June 2018
Update
RATINGS
Ageas SA/NVDomicile Belgium
Long Term Rating Baa2
Type LT Issuer Rating - DomCurr
Outlook Positive
Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.
Contacts
Giovanni Meloni [email protected]
Antonello Aquino +44.20.7772.1582Associate Managing [email protected]
Kevin Pun +44.20.7772.1531Associate [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Ageas SA/NVUpdate to credit analysis
SummaryAgeas SA/NV (Ageas; the issuer; formerly known as Fortis SA/NV) is the holding companyof the Ageas Group whose main assets are (i) 75% of AG Insurance (Insurance FinancialStrength Rating: A2 stable), a leading insurer in Belgium; (ii) Ageas UK (unrated), a Britishnon-life insurer; (iii) insurance activities in Continental Europe, amongst which most notably51% of MillenniumBCP Ageas (unrated) in Portugal along with the more recently acquirednon-life operations of AXA (Senior Unsecured: A2 stable) in Portugal (renamed AgeasSeguros, unrated); and (iv) insurance activities in Asia, which are non-controlled and for themost part jointly operated with local banking operators.
Moody's Baa2 long-term issuer rating of Ageas reflects the combined financial strengthand dividend capacity of the Group operating insurance companies, the subordination ofthe holding company creditors, and the currently sound financial situation of the holdingcompany, with an equity position of EUR 9.88 billion (excluding non-controlling interests)and a liquidity position of c. EUR 1.7 billion as at first quarter of 2018. The latter includes aring-fenced amount of EUR 0.9 billion in relation to the Fortis settlement agreement (seebelow). The investment-grade rating reflects Moody's expectation that the Group will be ableto meet all its financial obligations in the near term.
On 12 December 2017 Ageas announced to have reached an amended settlement addressingthe main concerns of the Amsterdam Court of Appeal as expressed in an interim decisionin June 2017. The amendment reflected Ageas’ additional effort of EUR 100 million (asannounced on 16 October 2017 and reported with the consolidated results as at Q3 2017),raising the overall budget for the settlement to EUR 1.3 billion. The Court stated it willannounce its decision on 13 July 2018.
The positive outlook on Ageas reflects the commitment shown by the issuer in settling thelegal dispute and the good capital and liquidity position of the group.
As of the date of this report this Issuer has declined to participate in the Credit Rating process, and has not providedMoody’s with access to its books, records and other internal documents. For more information about Non-ParticipatingRated Entities, see Moody’s Policy for Designating Non-Participating Rated Entities.
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Credit strengthsThe main credit strengths of Ageas are:
» The 75% ownership in AG Insurance via the holding in Ageas Insurance International N.V.
» Strong cash position along with the absence of senior debt at the holding company level
» Good capitalisation levels, with Solvency II coverage ratio at 191% as at first quarter 2018 (group level as reported to the regulatorunder the approved partial internal model)
Credit challengesThe main challenge of Ageas going forward is:
» To maintain a sustainable level of profitability commensurate to the rating, especially in its Belgian operations
Rating outlookThe outlook on Ageas is positive, reflecting the progress achieved towards resolving the uncertainty related to legal risk and thecorresponding costs arising from legacy issues in relation to Fortis group for events occurred in 2007 and 2008.
Nevertheless, our credit view on Ageas is likely to remain focused on the outcome of legacy issues stemming from the dismantling ofthe former Fortis Group, notably several legal actions initiated against Ageas.
Factors that could lead to an upgradeThe following factors could exert upward pressure on the ratings:
» A favourable resolution of outstanding legal disputes
» A material improvement of the credit standing of the operating companies, notably through an upgrade of the A2 insurancefinancial strength rating of AG Insurance
Factors that could lead to a downgradeWhile a downgrade is unlikely in the short-term given the positive outlook, negative pressure on the rating may be the result of:
» A negative outcome of the settlement agreement filed in the Netherlands and/or of any remaining legal dispute which could, inadverse scenarios, materially affect the financial resources of the holding company
» A deterioration of the financial strength of the operating companies, principally evidenced by a downgrade of the A2 insurancefinancial strength rating of AG Insurance
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 onwww.moodys.com for the most updated credit rating action information and rating history.
2 20 June 2018 Ageas SA/NV: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Key indicators
Exhibit 1
Ageas SA/NV [1][2] 2017 2016 2015 2014 2013
As Reported (Euro Millions)
Total Assets 103,341 104,294 104,486 103,559 94,783
Total Shareholders' Equity 10,162 10,205 11,975 10,912 9,330
Net income (loss) attributable to common shareholders 623 27 770 476 569
Gross Premiums Written 8,445 9,277 9,362 9,258 8,839
Net Premiums Written 8,216 9,016 9,066 8,904 8,503
Moody's Adjusted Rat ios
Goodwill & Intangibles % Shareholders' Equity 13.8% 15.1% 18.7% 19.5% 22.6%
Financial Leverage 25.4% 27.3% 23.8% 25.2% 25.0%
Total Leverage 39.0% 41.4% 36.6% 38.0% 39.9%
Earnings Coverage (1 yr.) 10.4x 4.2x 9.9x 7.6x 6.6x
[1] Information based on IFRS financial statements as of Fiscal YE December 31[2] Certain items may haven been relabeled and/or reclassified for global consistencySource: Ageas SA/NV, Moody's Investors Service
Capital structure and liquidityThe main outstanding debts within the consolidated Ageas Group as at year-end 2017 are:
» EUR 1.25bn of Tier I securities only redeemable in shares (FRESH) issued by Ageasfinlux S.A. (Backed Jr. Subordinate: Ba2(hyb)positive) in 2002
» EUR 0.5bn (USD 550 million) of Tier I issued by AG Insurance in March 2013
» EUR 0.1bn of Tier II dated securities issued by AG Insurance in December 2013 (part of EUR 450 million issuance)
» EUR 1.1bn of debts due to banks, mainly related to AG Insurance's real estate companies
» EUR 0.4bn of Tier 2 issued by AG Insurance in March 2015
Liquid resources held at the holding company (consisting of the sum of net cash and liquid assets) were at approx. EUR 1.7 billionas at first quarter 2018, down from EUR 1.8 billion as at year-end 2017, primarily due to the ongoing share buyback programmeconsisting of EUR 200 million per annum and approved until August 2018. We note that the current holding company liquidity positionincludes EUR 0.9 billion which have been ring-fenced to fund the settlement agreement related to the Fortis settlement. The currentholding company liquidity is sufficient to cover the expected cash outflow of EUR 1.12 billion, which will be gradually paid to eligibleshareholders, if and when the settlement is approved.
As at year-end 2017 the adjusted financial leverage for the Group was 25.4% (year-end 2016: 27.3%), and total leverage, excludinghybrids' equity credit and including operational debts, has also decreased to 39.0% (year-end 2016: 41.4%). Decreases in leasesobligations and repurchase agreements versus prior year primarily explain, respectively, the reduction in adjusted leverage and totalleverage.
The issuer's balance sheet and our leverage calculations include a financial liability related to a put option that Ageas granted to BNPParibas Fortis SA/NV (BNPPF; Long-Term Deposit: A1 stable; Senior Unsecured: A2 stable; BCA: baa1) on the 25% stake in AG Insurancethat BNPPF owns. The latter has therefore the option to sell this stake to Ageas in the six months starting 1 January 2018. Whenexcluding this put option --that is, if the option was not exercised-- the financial leverage ratio decreases to 17.8% (from actual 25.4%)and the total leverage to 33.1% (from actual 39.0%) at year-end 2017. Additionally, the issuer estimates that if BNPPF did not exercisethe put option, then Ageas' Solvency II coverage ratio would increase by approx. 10 percentage points as a result of the cancellation ofthe corresponding financial liability from the balance sheet.
3 20 June 2018 Ageas SA/NV: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Under IFRS, Ageas is required to recognise a financial liability against the exercise price of the put option, which is the prevailing marketvalue of the stake. Ageas' financial statements report a financial situation as if the group owned 100% of AG Insurance, instead ofthe currently controlled 75% stake. As the obligation to repurchase the non-controlled interest in 2018 (at the election of BNPPF)represents a potential call on the resources of Ageas, we view this liability to be debt-like, therefore the put option is included in thefinancial debt leverage calculation. It should be noted that the value of the option may evolve in line with the market value of AGInsurance. The amount of this liability slightly increased to EUR 1.45 billion as at year-end 2017 (up by c. 14.5% versus year-end 2016).
Moody's believes that the financial flexibility of Ageas is somewhat constrained by off-balance sheet commitments related to hybriddebt instruments issued by former group entities. In fact Ageas' holding company remains liable to support the interest payments onEUR 0.95 billion subordinated debt (CASHES) issued by previous group member Fortis Bank (nowadays BNPPF) in case the bank is notable to service this debt due to solvency problems. 3,791 CASHES remained outstanding as at year-end 2017.
The financial flexibility of the group has also been influenced by various legal claims outstanding that were initiated by shareholders inBelgium and the Netherlands claiming for monetary damages after the dismantling of the Fortis Group. In 2016 the group announcedto have agreed with four claimants' organisations on a deal to indemnify eligible shareholders in the amount of EUR 1.2 billion (EUR247 million thereof have already been paid). This agreement, which according to the issuer represented an estimated 90% of theshares involved in legal proceedings, has been subsequently endorsed by other claimants, amended in light of few comments from theCourt with respect to the distribution of the settlement amount between various stakeholders and then submitted for filing with theAmsterdam Court of Appeal, which will make a decision regarding the request to declare the settlement binding. The aforementionedamendment was announced in October 2017 and included Ageas’ additional effort of EUR 100 million, thereby raising the overallbudget for the settlement to EUR 1.3 billion; this amount is already fully provisioned for in Ageas' accounts. The Court stated it willannounce its decision on 13 July 2018.
Ageas expects the filed agreement to be eventually approved given the high amount of claimants being represented and endorsingthe deal. Moody's notes that even in case the Court itself endorsed the deal, Ageas retains the option to terminate the settlement ifshareholders eligible for compensation representing more than 5% of the settlement amount decide to opt-out.
We believe that said agreement is a fundamental milestone towards resolving the uncertainty related to the legal risks and thecorresponding costs arising from the legacy issues, however Moody's is likely to solve the positive outlook only when the legalproceeding has been concluded and Ageas proceeds with the compensation.
Structural considerationsThe notching differential between the A2 insurance financial strength rating at AG Insurance (Ageas' main operating subsidiary) and theBaa2 Long Term issuer rating at Ageas SA/NV is three notches. This is one notch wider than Moody's standard practice for an insurancegroup domiciled and operating in jurisdictions where group regulation is in effect and reflects the uncertainty related to the legal risksarising from the legacy issues detailed above.
The FRESH securities are rated three notches below the long term issuer rating. This additional notching reflects the higher risk ofcoupon deferral, as these securities allow for an Alternative Coupon Settlement Method (“ACSM”) when the annual dividend yield onthe Ageas share is below 0.5%. As at year-end 2017 Ageas paid approx. EUR 626 million of cash dividends, however we believe that thepayment of dividends could be challenged at some point in the future in case Ageas had to report significant losses, for instance as aresult of negative outcomes from legal disputes.
4 20 June 2018 Ageas SA/NV: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Exhibit 2
Financial Flexibility
0x
2x
4x
6x
8x
10x
12x
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2013 2014 2015 2016 2017
Earnin
gs Coverage (1 Y
r.)Le
vera
ge
Financial Leverage Total Leverage Earnings Coverage (1 yr.)
Source: Ageas SA/NV, Moody's Investors Service
Ratings
Exhibit 3Category Moody's RatingAGEAS SA/NV
Rating Outlook POSLT Issuer Rating Baa2
AGEASFINLUX S.A.
Rating Outlook POSBACKED Junior Subordinate Ba2 (hyb)
Source: Moody's Investors Service
5 20 June 2018 Ageas SA/NV: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
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6 20 June 2018 Ageas SA/NV: Update to credit analysis
MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS
Contacts
Giovanni Meloni [email protected]
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
7 20 June 2018 Ageas SA/NV: Update to credit analysis
