October 25, 2017 / 2:55 PM / a year ago

Fitch Affirms Ageas SA/NV at IDR 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 25 (Fitch) Fitch Ratings has affirmed Ageas SA/NV's Long Term Issuer Default Rating (IDR) at 'A'. The Outlook is Stable. Ageas SA/NV is the ultimate holding company of the Ageas group (Ageas). Fitch has also affirmed Ageas Insurance International NV's (an intermediate holding company) Long-Term IDR at 'A' and AG Insurance (AGI)'s and Ageas Insurance Limited (AIL)'s Insurer Financial Strength (IFS) Ratings at 'A+' (Strong). The Outlooks are Stable. A full list of ratings is at the end of this commentary. KEY RATING DRIVERS Ageas' ratings benefit from very strong solvency, solid liquidity position and very strong asset and liability management (ALM). However, challenging operating conditions in Belgium and the UK and low bond yields limiting the group's investment income are putting pressure on earnings. Fitch expects these conditions to persist. As Ageas's main operating subsidiary, Fitch views AGI as "Core" to the group and, as such, it has an IFS Rating of 'A+'. Through AGI, Ageas is the largest insurer in Belgium. Access to extensive and diversified distribution channels, including the banking network of BNP Paribas Fortis (Long-Term IDR: A+/Stable), is a positive for AGI's credit profile. In addition, AGI has a very strong solvency position and ALM. It should, however, be noted that BNP Paribas Fortis has the right to terminate this agreement with three years notice starting on 1 January 2018. Even if the notice is given, Fitch expects Ageas's franchise to remain strong in Belgium, as the group would leverage on existing customers and exploit alternative distribution channels, such as brokers. Fitch also views AIL as "Core" to Ageas and, as such, it has an IFS Rating of 'A+'. AIL is Ageas's main business in the UK, which is the group's second-largest market by premium after Belgium. However, AIL suffered from poor performance in 2016 and 1H17 due to restructuring costs and the negative impact of the Ogden rate review. Ageas injected EUR77 million in 2Q17 to strengthen AIL's capital position. We expect AIL's contribution to Ageas's profitability to improve in 2018. Ageas has an 'Extremely Strong' score under Fitch's Prism factor-based capital model (Prism FBM) based on end-2016 results. The score takes into account the disposal of Cargeas in Italy, the amount provisioned against potential settlement with several claimants and a renewed share buyback programme for EUR200 million. In addition, Ageas's financial leverage ratio was a low 16% at end- 2016, in line with 2015's 17%. Group debt leverage is very strong, and Fitch expects financial leverage to remain below 20% in the medium term. Ageas's profitability is strong but can be volatile. The group's insurance result was strong in 1H17 at EUR445 million (1H16: EUR409 million, excluding capital gains generated by the sale of AICA). In the same period, Ageas made a higher profit of EUR402 million versus EUR23 million in 1H16; IFRS earnings in 2016 were negatively impacted by the amount provisioned against the settlement agreed with several claimants (EUR894 million). Fitch believes Ageas's underlying profitability will remain under pressure from a competitive operating environment and ongoing low interest rates. Legacy financial instruments (in particular, the relative performance note - RPN(I) - structure) from the break-up of the Fortis group in 2009 continues to affect profitability at holding company level, where some volatility of the net result remains. However, Fitch expects management actions to reduce this volatility over time. Ageas holds a significant liquidity buffer, supported by cash and liquid assets reserves at the holding company level (EUR1.7 billion at end-June 2017). Fitch continues to view this positively, particularly in view of the ongoing litigation risk at Ageas SA/NV's level. Ageas's cash position was negatively impacted in 1H17 by ongoing share buyback and capital injection in the UK. Ageas announced on 16 October 2017 that it would provision a further EUR100 million to reach a settlement agreement with several claimants. Ageas had announced in June 2017 that the Amsterdam Court of Appeal did not make the settlement reached between Ageas and the claimant organisations on 14 March 2016 binding for all eligible Fortis shareholders. Fitch expects Ageas to file an amended agreement to the Court by end-2017. RATING SENSITIVITIES The ratings could be upgraded if Ageas' profitability improves over a sustained period, with a return on equity above 10% (2016: 0.3%), a pre-tax operating return on assets of 1.1% (2016: 0.2%) or above and group earnings being in line with 'AA' rated peers. Ageas's ratings could be downgraded if Ageas's Prism FBM score falls to the 'Strong' category or the group's profitability weakens significantly on a sustained basis, with a return on equity below 5% and a pre-tax operating return on assets below 0.4%. If Ageas fails to submit an amended agreement or the Court does not make the revised agreement binding, in the context of heightened litigation risk Fitch could downgrade Ageas SA/NV's IDR and widen the notching between the holding company and the other entities in the group. FULL LIST OF RATING ACTIONS Ageas SA/NV Long-Term IDR affirmed at 'A'; Outlook Stable Ageas Insurance International NV Long-Term IDR affirmed at 'A'; Outlook Stable AG Insurance IFS Rating affirmed at 'A+'; Outlook Stable Long-Term IDR affirmed at 'A'; Outlook Stable Subordinated bonds affirmed at 'BBB+' Ageas Insurance Limited IFS Rating affirmed at 'A+'; Outlook Stable Ageasfinlux SA Hybrid capital instruments affirmed at 'BBB-' Contact: Primary Analyst Federico Faccio Senior Director +44 20 3530 1394 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Nicola Caverzan Associate Director +44 20 3530 1642 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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