Ageas : AGEAS, still heading in the right direction

>Strengths/Opportunities - - Ageas boasts strong positions in Belgium where it is the leading life insurer, but also in mature European markets (e.g. UK, Luxembourg, Portugal) and in developing markets (Asia - presence in Hong Kong and partnerships in several countries including China). - Its geographical spread and product mix ensure strong earnings stability. - Ageas has solid capital ratios, reflected in a regulatory margin of 167% for the insurance activities and 178% group-wide. Using the group's internal model, the margin is 181% for the insurance activities and 199% for the group at large, above the 175% threshold set by management. Weaknesses/Threats - - The RPN (I) remains a source of volatility for earnings. The agreement signed with BNP Paribas expires in December 2016. - Uncertainty about the renewal of the agreement on the distribution of Ag Insurance products in the BNP Paribas Fortis network and the put option on AG shares held by BNP Paribas Fortis. Ageas holds 75% of AG Insurance and BNP Paribas Fortis the other 25%. BNP Paribas Fortis has a put option exercisable in H1 2018. Under the assumptions made by Ageas, this liability has a net present value of € 1bn. Possible negotiation regarding the sale of the interest could be related to the renewal of the distribution agreement which terminates in 2020. Full consolidation of AG by Ageas and renewal of the distribution agreement could potentially be good news. - Legal risk remains the chief source of uncertainty that could have a major impact on earnings. That said, things are looking up thanks to the settlement reached in civil proceedings which could be implemented in 2017. Ageas set aside € 1bn for ligation settlement and has already recorded an expense of € 889m in its 2016 financial statements. Other proceedings are ongoing and the size of potential fines and/or damages is hard to gauge. - The low interest-rate environment is a drag on inflows and premium income in life insurance. However, in view of its duration management strategy (zero duration gap in Belgium) and the reduction in credited rates in Belgium, margins are stable. Market recommendation: Recommendation: BUY on AG 2047/2027 – NEUTRAL on FRESH/CASHES - We continue to judge the issuer on its fundamentals given its strong competitive positions in Belgium, its Asian franchise, the quality of the non-life positioning in the UK, its strong capital ratios and adequate liquidity. Management is pursing a strategic plan with achievable targets for 2018. The announcements in 2016 on the ForSettlement settlement are positive for the credit, removing a number of uncertainties about the duration and cost of these proceedings. We are upgrading our credit opinion on Ageas to Stable and reiterating our Stable opinion on AG Insurance. Our recommendations: 1/ we remain Buy on the AG Insurance 2047/2027 notes which offer a 4% yield at the 2027 call for a 'BBB+' rating; 2/ we are upgrading our recommendation to Neutral on the FRESH trading at 48% currently; and 3/ remain Neutral on the CASHES whose current price of 66% leaves limited upside vs. a BNP offer.