Company Reports

On March 22 Ageas announced it was no longer interested in making an offer for Direct Line. This follows the announcement of Direct Lines’ results last week where a new performance plan was laid out and confidence in the future value of the business was clearly communicated. This effectively raised the hurdle over which Ageas would need to demonstrate value accretion to both its own shareholders and those of Direct Line. We maintain our fair value estimates and no-moat ratings.

Direct Line announced on March 13 that it received a revised and highly conditional indicative proposal from Ageas on March 9. This second bid raised the cash component from GBP 1.0 per share to GBP 1.2 per share, but lowered the stock component by increasing the Direct Line/Ageas share conversion rate from 25.24047 to 28.41107. This means the value of the stock component has been lowered from GBP 1.760 billion to GBP 1.536 billion. The total value of the offer has been marginally raised from GBP 3.079 billion to GBP 3.118 billion, or GBP 2.36 per share, an increase of 1.3%.

Direct Line announced it has rejected a GBP 3.1 billion takeover offer from Ageas, the Belgium insurer, at an implied share price of GBP 2.33 per share.

According to articles published by Reuters and the Financial Times, Ageas is considering a bid to buy Direct Line. The announced bid seems a little off to us, given the tone of Ageas' earnings call where capital allocation decisions seemed to reiterate a share buyback in the second half of the year. Ageas doesn’t have an enormous amount of cash, so we think any possible purchase would have to be funded by debt or a capital raise. This would be an outsize acquisition for Ageas at a reported GBP 3.1 billion, on the back of what seems to have been decent results in nonlife. We maintain our fair value estimates and no moat ratings for Ageas and Direct Line.

Ageas reported net income of EUR 953 million for 2023, below our EUR 1.031 billion forecast. These earnings equate to around EUR 5.17 per share, lower than the EUR 5.60 we estimated. The board is proposing a dividend of EUR 3.25 per share, ahead of the EUR 3.21 we forecast. Solvency has come in at 217%, slightly below company-compiled consensus of 221%, and Ageas holds liquid assets of EUR 959 million, slightly better than the EUR 954 million consensus penciled in. The group net operating result is also better than consensus estimates, within the targeted range of EUR 1.1 billion to EUR 1.2 billion, at EUR 1.17 billion, with Europe delivering better performance. The operational free capital generation of EUR 1.2 billion more than covers the nearly EUR 600 million dividend.

While Moody’s has affirmed its rating of Ageas as A1 with a Stable Outlook at the end of last year, building on the A+ Stable Outlook rating that the business received from Standard and Poor’s, we still believe the company has poor financial health and a weak balance sheet, given the large solvency sensitivities and the outsized debt-to-equity ratio. We maintain our no-moat rating and our fair value estimate.

Ageas is an improving business. However, it would do well to take a leaf out of other mid-sized European multi-line books and concentrate on core markets. Ageas has clear strength in its domestic market Belgium, evolving to be the market leader and is a dominant force in long-term savings. Its strategy in this line is to continue with the ongoing shift to unit-linked products that are capital-light despite lower margins. This is probably one of the reasons behind the company’s gradual but upward improvement in ROEs. Investments have played a decent part in improving customer service and protection offerings that can be sold into savings products, and this creates a sticker set of products and customers. These investments have oriented around improving standards of underwriting, and despite raising expenses the net effect in nonlife insurance has been positive. Ageas has a leading health insurance business with expenditure on health in Belgium being one of the highest in Europe. The firm targets price stability and ambulatory care services.

Ageas has reported average results for the first six months of the year. Management reiterates a target for a net operating result of between EUR 1.1 billion and EUR 1.2 billion for the full year. The operating free capital the business has generated over the last six months is EUR 492 million. As a result, management has announced the payment of a EUR 1.5 interim dividend per share, equal to around EUR 275 million. Ageas reiterated an average growth rate of 6% to 10% for its dividends per share.

We think Ageas is lacking a clear direction and proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. This is simply too many in our view. Insurance is a complex set of products and the historical approach has been one of diversification. However, what we frequently see within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. We understand that this approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. What we tend to find within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms' dominance in their chosen fields.

We think Ageas is lacking a clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. This is simply too many in our view. Insurance is a complex set of products and the historical approach has been one of diversification. However, what we frequently see within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. We understand that this approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. What we tend to find within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms' dominance in their chosen fields.

When looking at the exposure of insurers to the unfolding banking crisis, we believe this is limited. The main impact of the crisis currently seems to be contagion, so investors are selling shares cheaply. However, exposure to United States bonds is either in government bond securities, or exposure to Credit Suisse, Silicon Valley Bank, and other U.S. regional banks is immaterial, which is 50 basis points or less of their investment portfolio. Some do hold larger bank debt holdings of up to 5.5% of shareholder investments, but nearly all that debt ranks as senior. AT1 debt tends to be very minimal or there is no exposure as a policy with board-level approval. The vast majority of corporate debt held is investment-grade. We maintain our fair value estimates and moat ratings across our European insurance coverage. Allianz remains our Best Idea. Admiral is one of our top picks.

Ageas has reported a sharp rise in net income during the fourth quarter, ahead of our expectations, moving net profit from EUR 567 million to EUR 871 million between the nine-month and full-year points. Both numbers exclude the impact of the relative performance note. This is ahead of our EUR 729.1 million full-year estimate. However, this is an 8% fall versus the prior year's EUR 945 million, again excluding the relative performance note. The strongest reporting is within Ageas’s home market nonlife, which according to management is because of favourable claims experiences in motor and household. The main detractor is Asia, with the fall in equity markets meaning impairments and a continual drop in that regional discount curve. Management is proposing a EUR 1.50 dividend per share taking the full amount to EUR 3.00 over the year.

We think Ageas is lacking clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. This is simply too many in our view. Insurance is a complex set of products and the historical approach has been one of diversification. However, what we frequently see within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. We understand that this approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. What we tend to find within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms' dominance in their chosen fields.

Ageas has reported net income for the first nine months of the year at EUR 567 million, excluding the relative performance note. Our estimates are EUR 707 million for the full year and that includes a negative EUR 22.1 million adjustment for the relative performance note movement. We might be a little behind the full-year delivery.

While Ageas reported quite a strong bottom line for the first half of 2022—at EUR 563 million versus EUR 407 million in the same period last year—we think that most of this performance was driven by nonoperating items. Ageas’ interest, dividends, and other investment income rose by close to EUR 139 million, understandable in the context of available higher rates of return. However, what we think are by and large non-technical-driven elements of these results are a EUR 107 million gain on the revaluation of the relative performance note and EUR 249 million on the sale of Ageas’ stake in Tesco insurance. We argue that these largely appear to be nonrecurring and irregular items and are not part of the business’ normal operations. This means Ageas is likely to deliver a long-term annual earnings power of something in the region of EUR 410 million, substantially below the current profile. We maintain our EUR 36.50 fair value estimate and no-moat rating.

We think Ageas is lacking clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. This is simply too many in our view. Insurance is a complex set of products and the historical approach has been one of diversification. However, what we frequently see within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. We understand that this approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. What we tend to find within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms' dominance in their chosen fields.

We think Ageas is lacking a clear direction and proven strategy. Ageas is present in Belgium, United Kingdom and Continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business' asset management, you are essentially left with a business that has five divisions. This is simply too many, in our opinion. Insurance is a complex suite of products and the historical approach has been one of diversification. However, what we frequently see within primary insurers, and in particular multilines, with increasing diversification these businesses become a Jack of all trades and a master of none. We understand that this approach to diversification is highly important with the reinsurance end. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. What we tend to find within this and in particular within smaller multilines is that this diversification leads to a dilution of expertise and thus a dilution of dominance in their chose fields.

Ageas has reported an interesting set of first-quarter 2022 results that look strong at group but mask an underlying poor performance. Only one division has reported well—Belgium life. We believe this is cloaking poor operational performances within the remaining divisions. The company’s local life unit has reported a 40% rise in net income attributable to shareholders to EUR 97.7 million. This seems to be the result of a successful sales campaign across both unit-linked and traditional products in the broker channel. Margins are also up in these two lines, though within the traditional product this appears to be due to gains harvesting. Within unit-linked, the business does seem to have garnered a better technical margin. The local non-life result is down 24% to EUR 24.1 million, and that is on by and large flat premiums but a deterioration in underwriting within motor and home insurance, respective claims ratios rising by 14.0 and 17.7 percentage points.

Ageas has reported ok earnings for full-year 2021. The business has beaten our estimates and the average of analyst estimates collected by the company. However, we think a lot of this beat is due to higher capital gains and therefore we do not think the results are as good as the market seems to think they are. The net result for full-year 2021 has come in at EUR 844.8 million and that can be compared with the EUR 1,140.7 million for full-year 2020 and the EUR 979.2 million in full-year 2019. What we think is important to take away from these results is that the result in Belgium is quite flat to slightly negative, down 2% on the prior year and the same can be said for the U.K. with a fall of 7% in the net result here year over year. Continental Europe is also down 12%. However, the real lift in the numbers has come from Asia. Here, the net result for full-year 2021 is EUR 402.7 million and that is 50% higher than last year. For a better comparison the net result was EUR 514.9 million in Asia in 2019 and averaged EUR 343.5 million across the two years prior. Asia, for Ageas, is essentially a result in equity associates and the China-only result was down EUR 7 million at the 2021 nine-month mark and included EUR 42 million in higher capital gains at the same point in time versus the same period in the prior year. The total capital gain across Ageas Asia between full-year 2020 and full-year 2021 has come in EUR 62 million higher, which is a significant contributing factor to the EUR 134 million difference versus the Asia net result last year. We think the residual EUR 72 million is not coming from as much operational strength as management would lead investors to believe. A lack of transparency is still hurting Ageas and we maintain our fair value estimate and no moat rating.

Ageas’ share price has suffered of late, down a little under 500 basis points over the last month. We believe this is due to lack of understanding and hesitation in the market regarding its Asia business. These are non-consolidated, and with Ageas acquiring a 24.99% interest in Taiping Reinsurance and a 23% stake in IFLIC Asia in 2020, there are some real concerns about the unfolding real estate crisis. According to the Financial Times, while building by Evergrande has resumed, sales have dropped. Asia makes up around 4% of Ageas' assets but accounts for a little under 20% of earnings. However, the Asia operations are all non-consolidated partnerships, so we know little more than the bottom line in terms of operational strength. For the moment we maintain our EUR 54.25 fair value estimate and our no-moat rating.