AGESF - ageas: A 7.5% Yield Trading At Less Than 8 Times 2023 Earnings

2023-04-05 09:00:00 ET

Summary

• ageas is a Belgian insurance company focusing on both life and non-life insurance contracts.
• The book value dropped due to the lower value of the investment portfolio due to the higher interest rates.
• On an underlying basis, excluding unrealized gains and losses, the book value continues to increase.
• I think the worst is behind us, and retained earnings will absorb additional shocks.
• The dividend has been established at 3.00 EUR for FY 2022. Expect more dividend increases as ageas promised a 6-10% CAGR.

Introduction

ageas ( OTCPK:AGESF ) ( OTCPK:AGESY ) is a Belgian insurance company focusing on life and non-life insurance activities. Like so many other financial institutions, ageas owns a substantial investment portfolio where it invests its "float," and the value of that portfolio has obviously gone down in the past few quarters as higher interest rates are pushing the market value of securities lower. I think the worst is over, and as the company combines a generous dividend (3 EUR per share for a current yield of 7.5%, subject to the standard 30% Belgian dividend withholding tax rate) with a payout ratio of less than 70% based on the underlying results in 2022.

ageas has its main listing on Euronext Brussels where it's trading with AGS as ticker symbol . The average daily volume exceeds 500,000 shares and the stock is part of the BEL 20 index. I will use the Euro as base currency throughout this article.

2022 was a good year for ageas

For a better understanding of ageas, I’d like to refer you to an older article on this name.

Before discussing the insurance company’s full-year results, there's one important element to keep in mind. The fair value of the investment portfolio is subject to mark-to-market accounting but these unrealized gains and losses do not have to be recorded in the income statement. Instead, they're showing up in the comprehensive income statement, which is pretty similar to how for instance US banks treat the changes in the value of their portfolio of securities available for sale.

This means that when you look at the income statement, you will only see the fluctuation in the fair value of the investment portfolio related to unit-linked contracts for its client base.

As you can see below, the total "income" (read: revenue) was 10.4B EUR which is about 3.4B EUR lower than in FY 2021 but on the other hand, the operating expenses decreased by 3.6B EUR which subsequently allowed the pre-tax profit to increase from 1.23B EUR to 1.45B EUR resulting in a net income of 1.22B EUR.

Of the 1.22B EUR, approximately 212M EUR was attributable to non-controlling interests which means the net income attributable to the shareholders of ageas was 1.01B EUR which works out to 5.49 EUR per share. If you would exclude the result of the RPN , the Relative Performance Note, the net income was approximately 871M EUR. For more information on the RPN, see below:

It for sure is a complicated structure which is fortunately solving itself as the total amount of CASHES (and corresponding RPN) has steadily decreased over the past five years. In a way, we could say the 871M EUR in attributable net income is the underlying net profit while the 140M EUR in contribution from the RPN securities is likely non-recurring (or at least not something we should count on). The interest payments and the fair value determination are calculated as follows:

That being said, adjusting the financial result of ageas for all non-recurring items and the market impact, the underlying result would have been even higher than the 1.01B reported net attributable income.

So depending on how you would like to look at ageas’ performance, the net attributable income is 871M EUR on an underlying basis excluding the RPN impact but up to 1.06B EUR if you exclude what ageas considers to be non-recurring items and market items.

There are currently just 183.7M shares outstanding resulting in an EPS of 4.75 EUR/share in the conservative scenario, which means that based on the reported net income excluding the positive impact from RPN, ageas is currently trading at about 8.5 times earnings.

The insurance company used to be very active on the share buyback front, but it has now decided to prioritize dividends and the full-year dividend based on the 2022 results came in at 3.00 EUR. As you can see below, the dividend per share has pretty consistently gone up since 2011 .

We can expect further dividend increases as ageas has committed to a 6-10% dividend growth rate in the 2022-2024 era. Using the 2.75 EUR dividend over FY 2021 as starting point, a 6% CAGR in the dividend would result in a dividend of 3.28 EUR per share over FY 2024. Using a 10% CAGR, the dividend would jump to 3.66 EUR per share. I think the dividend payments will continue to increase and end up somewhere in the middle of the guidance. I’m not sure we can and should expect more 25-cent increases over the next two years but it certainly is likely unless there's a complete meltdown on the financial markets.

A closer look at the investment portfolio

While the reported net income is quite strong on an underlying basis, the insurance company still sees its book value go down due to the lower unrealized gains in its investment portfolio and the higher amount of unrealized losses. The image below shows the impact of the higher interest rates. The book value per share was 64.14 EUR as of the end of 2021 and this fell to just 41.29 EUR per share as of the end of 2022.

That being said, if you would exclude the unrealized gains and losses in both years, we would actually have seen an increase from 43.43 EUR to 45.61 EUR per share, thanks to ageas retaining a substantial portion of its annual earnings.

The solvency levels also remain very strong: The average solvency level across the group is 218%, up from 197% as of the end of 2021.

As of the end of 2022, the total investment portfolio of ageas came in at 69.9B EUR. The vast majority is invested in sovereign bonds and corporate bonds which account for in excess of 60% of the investment portfolio. Other loans represent in excess of 20% of the portfolio which means about 82.5% of the loans consist of bonds and loans.

Looking at the bond portfolios, the insurance company obviously invested in debt securities of the countries it is quite active in. About 98.5% of the sovereign bond portfolio is investment grade with the vast majority (in excess of 80%) obtaining a credit rating of A or higher.

The corporate bond portfolio also offers good quality as almost 90% of the bonds it invested in have an investment grade rating as well.

Investment thesis

While insurance companies are not immune to the fluctuation of their investment portfolios due to the volatile interest rate environment, they have one advantage over banks: There usually is no immediate need for cash and there usually is no urgent need for liquidity as the investment portfolio tends to match the anticipated payment dates for the corresponding liabilities. And on top of that, if interest rates move up, the liabilities can also be discounted by a higher percentage so there will be a correlation.

As interest rates seem to stabilize for the time being, I expect ageas to be able to keep its book value per share relatively stable going forward and smaller residual losses will likely be absorbed by the retained earnings of actually running the business. ageas guided for a normalized result excluding the RPN of " in excess of 1B EUR " which would result in an EPS of close to 5.50 EUR per share.

I own a substantial position in ageas which I initiated right after the COVID crisis hit. I have continued to write put options on an out of the money basis (with strike prices in the mid-30 range) which currently offers a 20%-30% discount to the book value. And if I don’t get assigned I can just pocket the option premium. A P35 for September for instance has an option premium of 1.5 EUR per contract while the stock is trading at around 40 EUR (subject to a 1.50 EUR dividend which will be detached between now and the expiration date).

For further details see: