EUR 850.00 For Business Accounts Only

Morningstar | Disappointing 3Q and 9M for Ageas

Ageas reported net income of EUR 656 million for the first nine months of 2018.  While overall this looks like a pretty good set of results on the surface, we think it has mainly been driven by noninsurance activities and is therefore of quite low quality. Our fair value estimate is EUR 42, which we are maintaining as the stock has come off from a EUR 45 close Nov. 13. Our valuation is 0.8 times 2018 book value, which in some circles might even be considered too generous. We are maintaining our no-moat and stable moat trend ratings.

There were a number of peripheral items announced in these results, including, with regard to the Fortis settlement, settling all civil court cases from the past declared as binding, expiration of the put option granted to BNP Fortis, and the announcement of the Connect 21 strategic plan that emphasises a focus on growth markets with the acquisition of Royal Sundaram General Insurance to add nonlife to its existing life business in the Indian nonlife market. The sale of Ageas' share of the Luxembourg Life business has also been concluded.

Ultimately, the life insurance business performed pretty much in line with prior results, delivering around EUR 463 million for the first nine months. While that looks a little light versus comparable periods, the miss really came in the third quarter. But we think this has mainly been driven by a really quite significant drop in the operating margin on guaranteed business across the group; it has declined a massive 30 basis points over the 12 months to this quarter, from 90 basis points to 60. We think this has been driven by significantly lower realised gains and losses and much higher impairments.

As Belgium accounts for more than 45% of the net result of the business, this is where we like to spend most of our focus. We are particularly disappointed with the general life result because Belgium posted slightly over 10% increase in inflows but this is not translated down to technical liabilities. These remain flat, and we are basically assuming that outflows in the guaranteed business are being made up for by inflows in much lower-operating-margin unit-linked business.

In terms of growth, it’s difficult to see where the business is executing well. While continental Europe and Asia could provide opportunities, results in these regions are static to languishing. The United Kingdom is a small turnaround story, but who knows what is going to come next for the business here with the ongoing political uncertainty; on top of that, the U.K. is currently a soft nonlife market.

We can see that the business is trying to focus on nonlife insurance. Management tells us that it has upped its prudence and provisioning in this division, and this is the cause of the nearly 8 percentage points in reserve releases. However, guidance is somewhere between 5% and 6%, and management are not budging from this. So we are a little inclined to believe that these prior periods of high releases have just been the result of a more benign claims environment as opposed to a structural shift in the underwriting quality of the business.

At the moment, we see Ageas as a multiline insurance company that is displaying some characteristics of a low-quality insurance business but still holds a mediocre valuation. We think pressure on the guaranteed rate remains a serious problem. Though from a balance perspective it remains one of the better-capitalised insurance businesses in the Benelux region, we think there are far better regional opportunities that warrant investor attention.