2023-09-16 07:37:37 ET
Summary
- ageas reports resilient operating performance and reaffirms dividend policy, making it an interesting income play in the European insurance sector.
- Inflows increase by 6% YoY, driven by strong growth in China, while operating profit declines due to lower results from the life segment.
- ageas offers a high dividend yield of 7.9% to 8.2%, and its dividend is sustainable, supported by its strong capital position and cash generation capacity.
ageas (AGESY) has recently reported a resilient operating performance and reaffirmed its dividend policy, making it an interesting income play in the European insurance sector.
As I've covered in a previous article , ageas is an interesting income play within the European insurance sector, given that it offers a high-dividend yield and its business has better growth prospects than most of its peers due to its exposure to Asia.
As the company has updated its financial performance related to the first half of the year a couple of weeks ago, in this article I analyze its most recent earnings and update Ageas' investment case.
Recent Earnings
During the first six months of 2023 , ageas has maintained a positive operating momentum, supported by both its life and non-life segments.
Inflows in the period amounted to €9.3 billion, an increase of 6% YoY at constant exchange rates, driven by strong growth in China, given that inflows increased by 12% compared to the same period of last year. On the other hand, in Portugal and Belgium its inflows were softer due to higher interest rates, with customers having now further alternatives to life insurance products, namely bank time deposits that are offering more competitive rates than compared to H1 2022, as the European Central Bank only started its hiking cycle in the summer of 2022.
In non-life, ageas reported inflows up by 11% supported by growth across all its business lines to more than €3 billion in the period, with motor remaining the largest line and accounting for some 33% of non-life inflows. Beyond positive volumes, the company's claim costs trended also positively, leading to a combined ratio of 93% in the period (vs. 96.2% in H1 2022).
Despite its good performance in non-life, Ageas' operating profit amounted to €599 million in H1 2023, a decline of 17% YoY, due to lower operating results from its life segment. This is justified by lower net capital gains and some currency headwinds, while in non-life its operating income increased by 35% YoY to €181 million.
Operating result (Ageas)
Despite the decline in operating profits, Ageas' profitability remained quite strong, given that its return on equity ((ROE)) ratio, a key measure of profitability within the insurance sector, was close to 17% in H1 2023. Regarding its operating capital generation, it increased to more than €1 billion in the first semester, due to strong value of new business, leading to a Solvency II ratio of 220% at the end of June, up two percentage points compared to the end of 2022.
This capital ratio is way above the company's internal target of at least 175%, thus ageas has an 'excess capital' position, being a strong support for its dividend. Moreover, its cash position also improved during the semester, as the company received dividends from its operating entities, which were above its holding dividend outflows. Therefore, its cash at the holding level increased to €830 million at the end of June, a significant increase compared to €624 million at the end of last year. For the full year, Ageas' guidance is to achieve an operating results between €1.1-1.2 billion, which represents a slight improvement from last year.
Regarding its dividend, ageas has initiated a new dividend policy in 2022, distributing two dividends per year, while in the past its policy was to distribute only an annual dividend.
The company has decided to distribute an interim dividend of €1.50 per share, unchanged compared to the previous year, while its final dividend will be set at a level that should lead to annual dividend growth of 6-10%. Given that its last annual dividend (interim plus final) was €3 per share, its total dividend related to 2023 earnings should be between €3.18-3.30 per share. This means that, at its current share price, ageas offers a forward dividend yield between 7.9% and 8.2%, which is quite attractive for income investors.
While sometimes a high-dividend yield may be a warning sign of poor dividend sustainability, I don't think that is the case with ageas, as the company's capital position is quite strong and its cash generation capacity also supports its dividend. Indeed, in 2022 its cash remittances amounted to €750 million, which covered its dividend cash outflow, while during 2023 its cash are expected to be above €700 million. This may not fully cover its dividend outflow, but considering that ageas has more than €800 million in cash at the holding level and annual expenses at the holding are below €200 million, it can easily distribute a growing dividend over the next few years.
Additionally, it can also issue debt at the holding level, both senior and subordinated debt, which would increase its cash position and would not be an issue to its debt leverage ratio, given that it was 26% at the end of 2022, a ratio that has some room to increase without being a threat to its credit rating.
This means that Ageas' dividend is sustainable over the next few years, a profile that seems to be also supported by the street. Indeed, according to analysts' estimates , ageas is expected to gradually increase its dividend in the coming years, to more than €3.70 per share by 2026. Therefore, ageas high-dividend yield is likely to increase even further in the near future, supported by its fundamentals and positive growth prospects.
Conclusion
ageas offers a high-dividend yield that is sustainable over the next few years and is supported by the company's positive operating momentum in recent quarters. Moreover, while the insurance sector can be considered to be mature and growth prospects are usually muted, its exposure to Asia gives it a better growth profile than compared to most of its peers.
Despite this background, Ageas' valuation is quite attractive compared to the European insurance sector, given that it's currently trading below book value, while the average of its closest peers is close to 1.2x book value. Thus, ageas seems to be an interesting income and value play in the European insurance sector for long-term investors right now.
For further details see:
ageas: 8% Yield Supported By Recent Earnings