AGESF - ageas: A Good Combination Of Value And Income

2023-10-30 23:15:42 ET

Summary

• ageas offers a discounted valuation and a high-dividend yield, making it an interesting play in the European insurance sector.
• ageas has shown improved financial performance, with higher premiums and profits in the first half of 2023.
• The company's strong capital position and sustainable dividend policy make its high-dividend yield attractive to income investors.

ageas ( AGESF ) currently offers a discounted valuation and a high-dividend yield, remaining an interesting play within the European insurance sector.

As I’ve analyzed some months ago, ageas is a good income pick within the European insurance sector, offering a high-dividend yield and better growth prospects than most of its peers due to its exposure to Asia, a region where life insurance has much lower penetration than compared to Europe, boding well for ageas long-term business prospects.

In this article, I do an update regarding its recent earnings and its outlook for the next few years and update its investment case to see if ageas remains an interesting income play for long-term investors.

Financial Overview

The insurance market is quite mature in Europe and therefore growth is relatively muted for insurance companies, leading to relatively stable premiums and earnings. However, this profile has changed somewhat in the recent past due to Covid and more recently the rising interest rate environment, leading to higher earnings volatility than expected for insurance companies.

ageas has been no exception and its financial performance has been somewhat more volatile than expected in the recent past, even though its operational momentum has improved over the past eighteen months.

This positive momentum has continued in the past few months , considering that ageas has delivered higher premiums and profits during the first half of 2023. This positive performance has been supported both by its life and non-life segments, which is a positive sign regarding the sustainability of its improved financial performance.

Nevertheless, in the life segment, its business in China was the major growth engine, reporting higher inflows in the period (+12% YoY), while in Continental Europe the company’s net inflows were much softer due to competition from alternative investments, namely bank deposits.

This happens because during the low interest rate environment, customers searched for investment alternatives, including life insurance products, while due to the rising interest rate environment other fixed-income alternatives have higher returns making life insurance products less attractive.

This is particularly relevant in Belgium, where the government has recently offered retail bonds with a higher return than bank deposits or life insurance products, thus net inflows for ageas and other insurance companies in the country are likely to be negative in the second half of 2023. This will be a headwind for life premiums growth in H2 2023, which the company is expected to report at the beginning of 2024.

Investors should note that ageas, like some European companies, only reports its financial performance twice per year, thus there will not be any update regarding its Q3 financial performance in the coming weeks.

In the non-life segment, new volumes were also positive given that inflows increased by 11% YoY, supported by a positive performance in the motor segment, which remains its most important insurance product in the non-life segment.

Despite a positive trend regarding its top-line, ageas has reported lower operating results in H1 2023 to €599 million (-17% YoY), impacted negatively by currency movements and lower capital gains in the life segment, while operating income in the non-life segment increased by 35% YoY, to some €181 million in the semester. However, as the business is significantly skewed to life insurance, better operating performance in the non-life business unit was not enough to offset weakness in the life unit, a trend that is likely to persist in the coming months.

Regarding its profitability, ageas reported a return on equity ((ROE)) ratio of nearly 17% in H1 2023, a very good level of profitability within the European insurance sector, and generated close to €500 million in the capital during this period. This is a key support for a strong capital position and a sustainable dividend policy over the long term, as the company is in a good position to distribute a large part of its profits to shareholders.

Given that ageas only wants to maintain a Solvency II ratio of at least 175%, this means the company has a substantial excess capital position, which enables it to distribute more than its cash generation to shareholders.

Indeed, its cash dividend outflow was slightly above €1 billion in 2022, while its cash upstream from operating entities to its holding level amounted to €753 million, and is expected to be €713 million in 2023. This means that ageas is distributing more cash to shareholders than generates from its operating entities, which is not worrisome due to its strong solvency position that makes its dividend sustainable in the near future. Moreover, its cash position at the holding level was €830 million at the end of last June, thus the company has more than enough liquidity to maintain a growing dividend trajectory in the next few years.

This means that ageas is more likely to maintain its dividend policy in the near term, paying two distributions per year. Its interim dividend was paid some days ago, amounting to €1.50 per share and unchanged from the previous year, while its final dividend is expected to be paid by mid-2024.

According to analyst’s estimates , its total dividend related to 2023 earnings is estimated at €3.18 per share, a slight increase from the previous year (€3 per share) of about 6%. This is at the bottom of the company’s annual dividend growth range of 6-8%, thus ageas seems to have some room to beat current market expectations, even though not likely by a great margin and I don’t expect its dividend announcement to have a major impact on its share price.

Nevertheless, considering an annual dividend of €3.18 per share, thus means ageas is currently offering a forward dividend yield of about 8.8%, which is quite attractive to income investors.

While in some cases a high-dividend yield can be seen as a warning sign that dividend sustainability is questionable, this is not ageas’ case because it has a strong capital position, good liquidity at the holding level, and generates organic cash to cover a large part of its annual dividend. Additionally, given that ageas debt position is also quite good, it has the financial flexibility to issue new debt at the holding level and maintain its dividend policy over the next few years, making its dividend clearly sustainable.

Conclusion

ageas is heavily exposed to life insurance in Europe, which can be considered a mature industry, but its exposure to Asia gives it better growth prospects than most of its closest peers. Despite that, I see its high-dividend yield as the most attractive feature of its investment case, which is also supported by an attractive valuation.

Indeed, ageas is currently trading at only 6x forward earnings, while its own historical average over the past five years is around 8.5x, thus ageas offers currently an interesting combination of value and income for long-term investors.

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