Nov 27 -
Summary analysis -- AG Insurance ---------------------------------- 27-Nov-2012
CREDIT RATING: Country: Belgium
Local currency A-/Stable/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
03-Aug-2009 A-/-- --/--
29-Sep-2008 A/-- --/--
17-Jul-2008 A+/-- --/--
The ratings on AG Insurance reflect Standard & Poor's Ratings Services' view of Ageas'
strong competitive position and strong capital adequacy. Factors weighing on the ratings, in our
opinion, are Ageas' operating performance and its constrained financial flexibility.
We view Ageas' competitive position as strong. In Belgium, AG Insurance's strong position
derives from a diversified sales force, diversified product ranges, and broad clientele
coverage. AG Insurance's solid position in Belgium through long-term bancassurance ties and
brokerage is complemented by Ageas' defendable positions abroad, particularly in the U.K. where
the group recently reinforced its presence by acquiring Groupama Insurance Co. Ltd. (not rated).
However, the depressed economic environment affecting Portugal weighs on our assessment of
Ageas' competitive position. We also see Ageas' lack of meaningful control over its Asian
affiliates as a rating weakness.
We view Ageas' capitalization as supportive of the ratings. Capital adequacy is strong,
according to Standard & Poor's risk-based insurance capital model. The group's concentration
risk has declined over time and therefore alleviates capital strains attached to weakening
earnings in life and the overall adverse capital market environment. In 2012, the acquisition of
Groupama Insurance Co. Ltd., and an additional EUR200 million share buyback in our view had a
manageable impact on the group's capitalization.
We believe Ageas' long-term operating performance is good and sustained by life and non-life
diversification. Ageas' markets are highly competitive in both disciplines, however, putting
pressure on margin sources. Non-life earnings are constrained by a highly competitive,
broker-oriented Belgian market, and exposure to natural catastrophes. Life earnings are
gradually pressured by the low interest rate environment and relatively high average guarantees,
despite declining guarantees on new business. Profits may in our view be subject to additional
asset impairments, after those recorded on Greek government bonds, which largely impaired 2011
results, with a bottom line loss of EUR674 million. High expense ratios in property and casualty
(P/C) and a high concentration of earnings in Belgium add pressure on earning prospects. The
focus on Belgium is being accentuated as the contribution of Portuguese operations
(Millenniumbcp Ageas Grupo Segurador S.G.P.S. S.A; MAGS; operating companies rated
BB/Negative/--) is likely to be further dampened by the tough domestic environment. In life,
Ageas' results are weakening and were below our base-case expectations in 2011. Ageas' reported
new business margins were 0.7% in 2011, compared with Standard & Poor's expectations of at least
1%, mostly due to France and Portugal where the lower swap rate and the adverse economic
environment, respectively, is affecting the group's earnings. In P/C, Ageas met our base-case
scenario in Belgium with a net combined ratio of 100% in 2011 and 99% in the first nine months
of 2012 excluding worker's compensation, versus 104% in 2010. Still, the group's three-year
average net combined ratio remains relatively high at 102%. Similarly, in the U.K., Ageas' net
combined ratio recently improved (it was 99% in the first nine months of 2012), but higher
claims frequency and reserve strengthening led the group's net combined ratio to peak at 110% in
2010. We expect continuing pressure on earnings in 2012 and 2013, reflecting our belief that the
maintenance of investment margins in life and more competitive pressure in non-life will be the
main challenges to the group. The operating return on embedded value and new business margin are
likely to be maintained respectively close to 5% and in the 0.5%-1% range over the next two
years. The group's net combined ratio in Belgium will stand close to 100%, excluding the
worker's compensation business that might add up to 2 percentage points to the net combined
ratio. A deterioration of the net combined ratio in Portugal is in our view likely, but we
expect it will continue to stand below 90% in 2012.
We view financial flexibility as good, particularly as we foresee relatively low additional
capital needs from Ageas' growth prospects. Our opinion is that Ageas' recent acquisition in the
U.K. and capital repurchase of EUR250 million in 2011 and EUR200 million in 2012 do not reflect
long-term trends in its capital management. Pressure on financial flexibility arises from our
belief that the group largely relies on its earnings capacity, which we view as only good.
Currently a relatively high amount of hybrid debt remains outstanding, of which a significant
part is on lent hybrid debt to Fortis Bank. Furthermore, despite recent positive
actions, we believe the group has yet to build a strong enough reputation in the investment
markets to access capital markets under acceptable conditions, particularly with regards to its
ongoing, still not fully closed, legacy issues.
The stable outlook reflects our assessment that Ageas' diversified business profile and
carefully managed capital adequacy and investments are likely to balance the pressure on its
life and non-life operating performance and provide it with sufficient latitude to withstand its
reduced financial flexibility during the coming two years.
We could raise the ratings on AG Insurance if Ageas exceeds our expectations while
maintaining strong levels of capital adequacy. Conversely, we could lower the ratings if the
group does not meet our earnings expectations or if capital adequacy weakens to levels
inconsistent with the current ratings, particularly if significant losses occurred because of
legal proceedings or the general account. We could also lower the ratings if Ageas' presence in
Portugal was to weaken the group's business and/or financial profile more quickly or to a
greater extent than we currently expect.