OREANDA-NEWS. Fitch Ratings has upgraded Ageas Insurance International NV's (Ageas' immediate holding company) Long term Issuer Default Rating (IDR) to 'A' from 'A-'. The ultimate Ageas holding company, Ageas SA/NV, has also been upgraded to Long-term IDR 'A-' from 'BBB+'.

At the same time, Fitch has upgraded Ageas SA/NV's hybrid instruments by one notch. The ratings actions follow the publication of Fitch's updated insurance notching criteria on 14 July 2015 after an initial exposure draft of proposed criteria on 15 May 2015. No other ratings are impacted by the changes to Fitch's notching criteria.

Fitch has also withdrawn operating companies Ageas Insurance International NV and Ageas SA/NV's Short-term IDRs at 'F1' and 'F2' respectively as they are no longer considered by Fitch to be relevant to the agency's coverage.

In addition Fitch has affirmed Ageas' other operating companies: AG Insurance and Ageas Insurance Limited.

The Outlooks on the IFS ratings and the Long-term IDRs are all Stable.

A full list of ratings is provided at the end of this commentary. The updated notching criteria appear in Section VI of the insurance master criteria report Insurance Rating Methodology.

KEY RATING DRIVERS
Following the updated criteria Fitch no longer notches down Ageas' holding company IDRs from the operating companies' IDRs. Under the new insurance notching criteria, no notching is applied to investment grade insurers in regulatory environments where the "group solvency" regime is being employed, subject to certain exceptions, and when earnings or capital for the home territory makes up more than 30% of the total. The Ageas Group meet both criteria, hence the upgrade of the holding companies' IDRs.

The upgrades of Ageas SA/NV's hybrid instruments follow the upgrade of the holding companies' IDR.

AG Insurance, as the main operating subsidiary in Ageas, is viewed by Fitch as "Core" to the group and, as such, carries an IFS rating of 'A+'. Ageas, through AG Insurance, is the largest insurer in Belgium. Access to extensive and diversified distribution channels, including the banking network of BNP Paribas Fortis (A+/Stable), is a key positive rating factor.

Ageas Insurance Limited is also viewed by Fitch as "Core" to Ageas and, as such, carries an IFS rating of 'A+'. Ageas Insurance Limited is Ageas' main business in the UK, which is the second largest country by premium for the group after Belgium, and is a key part of Ageas' operations.

The ratings of Ageas benefit from strong solvency. The group's regulatory solvency margin was 226% at end-March 2015. According to Fitch's Prism factor-based capital model (Prism FBM), Ageas was "Very Strong" based on 2014 results. Fitch expects solvency to remain strong, supported by retained earnings, even after allowing for the group's share buyback programme.

Ageas' financial leverage ratio was 21% at end-2014, in line with 2013's, and below the agency's median guidelines for the 'A' IFS category. When the EUR400m bond issue and redemption of existing debt carried out by AG Insurance (Ageas' core subsidiary) in 2015 are taken into account, the group leverage only marginally increases to 22% using 2014 data. This is well below the 25%-30% range prior to 2013.

Ageas' underwriting profitability is robust. The operating margin on life guaranteed products, measured by return on assets, declined to 0.7% in 2014 (2013: 1.4%) as Ageas' share in the result of associates was lower. The group's combined ratio worsened slightly to 99.6% in 2014 (2013: 98.3%), following higher levels of catastrophe activity during the period.

Challenging underwriting conditions in Belgium and the UK and low bond yields limiting its investment income are putting pressure on the group's earnings. Fitch expects these conditions to persist. A mitigating factor is Ageas' business in Asia and Turkey, which is more profitable.

The ratings of the Ageas holding companies take into account the group's strong net cash position, which totalled EUR1.6bn at end-March 2015. Legacy non-core insurance business from the break-up of the Fortis group in 2009 continues to affect profitability at holding company level, where the net result continues to be volatile. However, Fitch expects management actions to reduce this volatility over time.

Following the restructuring of Ageas in 2008, Fitch believes that Ageas SA/NV continues to face litigation risk from former Fortis shareholders in Belgium and the Netherlands. Despite the company's denial of all allegations, if the actions against Ageas SA/NV are successful, they could eventually have a substantial negative financial impact on the company. This litigation risk is reflected in Ageas SA/NV's IDR being one notch lower than the IDR of AG Insurance.

RATING SENSITIVITIES
Ageas' ratings could be downgraded if the group's Prism FBM score falls to the "Strong" category, on a sustained basis. The ratings could also be downgraded if the group's profitability weakens significantly, with a pre-tax operating profit return on equity below 5% (2014: 9%) and a pre-tax operating return on assets below 0.4% (2014: 0.7%).

Ageas' ratings could also be downgraded if the litigation risk results in material losses for the group well in excess of the provisions currently held.

The ratings could be upgraded if Ageas' profitability improves over a sustained period, with a pre-tax operating profit return on equity of at least 12%, a pre-tax operating return on assets of 1.1% or above, and group earnings being in line with 'AA'-rated peers.

FULL LIST OF RATING ACTIONS

AG Insurance
IFS rating affirmed at 'A+'; Outlook Stable
Long-term IDR affirmed at 'A'; Outlook Stable
Subordinated bond affirmed at 'BBB+'

Ageas Insurance Limited
IFS rating affirmed at 'A+'; Outlook Stable

Ageas SA/NV
Long-term IDR upgraded to 'A-' from 'BBB+'; Outlook Stable
Short-term IDR affirmed at 'F2'; withdrawn

Ageas Insurance International
Long-term IDR upgraded to 'A' from 'A-'; Outlook Stable
Short-term IDR upgraded to 'F1' from 'F2'; withdrawn

Ageas Hybrid Financing
Hybrid capital instruments upgraded to 'BBB-' from 'BB+'

Ageasfinlux SA
Hybrid capital instruments upgraded to 'BB+' from 'BB'