Negative outlook on AG Insurance's IFSR; developing outlook on Fortis Holdings' issuer rating
Paris, July 15, 2009 -- Moody's Investors Service today confirmed AG Insurance's (formerly
known as Fortis Insurance Belgium) A2 insurance financial strength rating
(IFSR) and downgraded the issuer ratings of Fortis SA/NV and Fortis NV
to Baa3 from Baa2. The ratings of the debt issued by Fortis Finance
NV, Fortis Hybrid Financing and Fortfinlux were also downgraded
by one notch. AG Insurance's rating carries a negative outlook,
while the ratings of Fortis SA/NV, Fortis NV, Fortis Finance
NV, Fortis Hybrid Financing and Fortfinlux carry a developing outlook.
Moody's has also downgraded the short-term rating of Fortis
Finance NV to Prime-3 from Prime-2 and will withdraw this
rating as Fortis does not have any commercial paper outstanding.
Please refer to Moody's rating withdrawal policy available on www.moodys.com.
Moody's adds that the Baa1 IFSR of Fortis Insurance Company (Asia,
FICA) Ltd and the Baa2 backed senior unsecured debt rating of Fortis Capital
(Asia) Ltd are unchanged. The outlook on these ratings remains
developing, reflecting the uncertainty surrounding FICA's
A list of all the ratings affected by this rating action is available
at the end of the press release.
This rating action concludes the review for downgrade on AG Insurance
and all the Fortis Group ratings initiated on 13 February following Fortis's
shareholder vote to disapprove the sale of Fortis Bank SA/NV to the Belgian
state and the subsequent collapse of an agreement signed between BNP Paribas,
Fortis and the Belgian government. Following this vote, a
new agreement has been made between Fortis, BNP Paribas and the
Belgian state, according to which, among other things,
BNP Paribas will buy 75% of Fortis Bank SA/NV from the Belgian
state and Fortis Bank will acquire 25% of AG Insurance from Fortis
Group. This new agreement was approved by Fortis shareholders on
29 April and by the European Commission on 12 May.
Moody's says that the confirmation of AG Insurance's A2 IFSR
reflects the company's leading market position in Belgium,
diversified business profile, conservative investment portfolio
and adequate capitalisation, which means that it is resilient to
further stresses on its assets and liabilities.
The rating agency notes that, despite the challenging period experienced
by the Group since October 2008, AG Insurance has maintained a leading
position in the Belgian insurance market. Furthermore, the
distribution agreement between AG Insurance and Fortis Bank SA/NV will
be maintained until 2020, enabling Fortis to maintain some diversity
in its distribution strategy and to further develop its commercial activity
with the bank's clients, especially in the retail life segment.
Moody's adds that AG Insurance undertook a de-risking of
its investment portfolio throughout 2008, such that equities,
real estate and structured investments represented less than 10%
of this portfolio as of 31 December 2008. Moreover, bonds
issued by the government and government-related entities represented
more than 75% of the investment portfolio. This conservative
investment profile and the company's adequate solvency (including
off-balance sheet unrealised gains on real estate) mean that AG
Insurance has a very high level of resilience to any further stress in
the financial markets, notwithstanding the interest rate risk that
the company has managed recently by reducing the duration gap between
its assets and liabilities.
However, Moody's also says that the company's operating
profitability has deteriorated recently with a non-life combined
ratio consistently above 100% since 2007 and life profitability
adversely affected by lower volumes and weakened financial results in
2008. Moody's expects the profitability of AG Insurance to
remain challenged in the medium term as a result of tough competition
in the non-life market and relatively high guarantees granted in
life policies, which could limit the company's financial margin
in the current low interest rate environment. According to Moody's,
this low profitability may also constrain the company's financial
flexibility through limited earnings coverage.
The negative outlook on AG Insurance reflects a potential lag effect in
the deterioration of its franchise following Fortis Group's dismantling
in Q4 2008, especially in the brokerage segment, and the challenges
posed by the ongoing recession on the company's operating profitability.
Moody's notes that downward pressure could be exerted on AG Insurance's
rating by: (i) further deterioration in the company's franchise
shown by an increase in lapse rates or an inability to attract new inflows
in the life segment, or an increase in the churn rate in the non-life
segment; (ii) deterioration in profitability with a normalised return
on equity of below 8%, as a result of an increase in non-life
claims or lower financial results; or (iii) deterioration in capitalisation,
for example as a result of a passing on of exceptional dividends to shareholders
in excess of EUR250 million or a decline in real estate prices of more
Conversely, positive pressure could be exerted on the rating in
the event of a sustainable improvement in profitability and financial
flexibility. However, Moody's says that any rating
upgrade of AG Insurance is unlikely at this stage.
FORTIS SA/NV AND FORTIS NV
Following Fortis Group's dismantling, which was initiated
in October 2008, and the agreements signed with BNP Paribas and
the Belgian government, Fortis SA/NV and Fortis NV are the holding
companies of the existing Group, whose main assets are (i) 75%
of AG Insurance, (ii) Fortis Insurance International and (iii) a
EUR760 million investment in the equity tranche of an SPV managing structured
investments initially held by Fortis Bank SA/NV. Fortis Group also
includes some financial assets and liabilities and financing vehicles.
At the time Moody's initiated the review for possible downgrade
of Fortis' holding companies on 13 February 2009, the Group
was bound to sell 100% of its Belgian insurance company to BNP
Paribas and the Group had committed to finance Royal Park Investments
(the SPV set up to manage some structured investments initially held by
Fortis Bank SA/NV) up to EUR6.9 billion, which would have
resulted in a significant deterioration of the group's credit risk
profile and significant rating impact. However, a new agreement
signed with BNP Paribas and the Belgian government has clarified the Group's
strategy, with a clear focus on insurance operations and has significantly
reduced the risk of a deterioration of the Group's balance sheet
by limiting the investment in the SPV to EUR760 million and the sale of
the insurance company to 25%.
Moody's says that the downgraded Baa3 long-term issuer ratings
of Fortis SA/NV and Fortis NV reflect the combined financial strength
of the Group's operating insurance companies, the subordination
of the holding company creditors and the currently sound financial situation
of the holding companies, with an estimated pro-forma equity
position as of 30 June 2009 of EUR7.1 billion and a cash position
of around EUR3.8 billion, covering EUR1 billion of outstanding
debt (excluding all debts economically matched by loans to operating companies).
However, Moody's expects the value of the investment in the
SPV to be impaired in the long term and the cash position of the company
may be affected by the strategic review, including the new dividend
policy. In addition, the rating agency adds that the holding
company ratings reflects the extra risks borne by the holdings due to
off-balance sheet commitments towards previously owned entities,
mainly through their co-obligation in debts issued by Fortis Bank
Nederland (Holding), Fortis Insurance Netherlands and Fortis Bank
SA/NV, which could constrain the Group's financial flexibility,
notwithstanding the substantial reduction of these liabilities in recent
months. It also reflects the risks related to several legal actions,
mainly those initiated by shareholders in Belgium and the Netherlands
requesting the annulment of the decisions that led to Fortis Group's
dismantling last year and claiming for monetary damages.
Moody's developing outlook reflects the uncertainties related to
the legal disputes over Fortis holding's financial situation and
the strategic review launched by the Group regarding its business and
capital strategy. Fortis expects to communicate the results of
this review in Q3 2009.
Moody's comments that in the event of simplification of off balance
sheet commitments and AG Insurance's rating remaining stable,
the issuer ratings of Fortis SA/NV and Fortis NV could be upgraded to
Baa2. However, in the event of an adverse outcome to the
legal disputes with a significant impact on the holding's financial
resources, the rating agency says that additional negative pressure
could arise on the rating.
FORTIS FINANCE NV
Fortis Finance NV is a funding vehicle guaranteed by Fortis SA/NV and
Fortis NV. As of 30 June 2009, EUR1 billion of debt issued
by this entity was outstanding.
Moody's says that the rating action on Fortis Finance NV fully reflects
the guarantee from the Group's holding companies and therefore follows
the rating action on Fortis SA/NV and Fortis NV.
FORTIS HYBRID FINANCING (NITSH I, NITSH II and HYBRONES)
The hybrid debts issued by Fortis Hybrid Financing (NITSH I, NITSH
II and the Hybrones) have been on lent to Fortis Bank SA/NV and AG Insurance.
Therefore, these debts are economically matched by loans to operating
entities. However, they are served by Fortis SA/NV and Fortis
NV and therefore the rating action on these debts reflects the rating
action on the Group's holding companies.
Moody's notes that the Hybrones security allows for the payment
of coupons through an ACSM (alternative coupon settlement method) in the
event of Fortis Group making a substantial loss. The rating agency
says that, although this trigger was breached at the end of 2008,
Fortis has continued to service the coupon in cash.
The only trigger events included in the NITSH I and NITSH II are based
on the Group's solvency situation (also included in the Hybrones).
Moody's says that it does not expect this solvency to deteriorate
below the level that would force the Group to use the ACSM in the medium
term. Therefore, the rating agency does not apply any additional
notching for these securities.
FORTFINLUX SA (FRESH)
The FRESH securities are also backed by Fortis SA/NV and Fortis NV,
and therefore the rating action on this security reflects the rating action
on the Group's holding companies.
Nonetheless, Moody's notes that an additional notching has
been applied to this debt since 19 March 2009, following the announcement
made by Fortis that it will not distribute any dividends for 2008 and
the Group's disclosure of its proposed capital restructuring plan.
The rating action reflected the increased risk of coupons being postponed
as the terms and conditions of the notes include a mandatory deferral
trigger tied to ordinary dividend payments.
Although the Group announced its intention to resume the payment of dividends
in 2009, thus resuming the payment of coupons in cash, Moody's
considers that the risk of coupon deferral is still greater than for other
securities. This is because the payment of dividends might be challenged
if the Group were to report losses, as a result of the adverse outcome
of legal disputes, for example.
LIST OF RATINGS
The following rating has been confirmed and carries a negative outlook:
- AG Insurance (formerly known as Fortis Insurance Belgium) --
A2 insurance financial strength rating
The following ratings have been downgraded and carry developing outlooks:
- Fortis SA/NV -- long-term issuer rating to Baa3
- Fortis NV -- long-term issuer rating to Baa3
- Fortis Finance NV -- backed senior unsecured debt rating
- Fortis Finance NV -- backed senior unsecured MTN debt rating
- Fortis Finance NV -- backed subordinated MTN debt rating
- Fortis Finance NV -- backed junior subordinated MTN debt
rating to Ba1
- Fortis Hybrid Financing -- backed junior subordinated debt
rating to Ba2
- Fortis Hybrid Financing -- backed preferred stock debt rating
- Fortfinlux SA -- backed junior subordinated debt rating
The following rating has been downgraded and will be withdrawn:
- Fortis Finance NV -- backed commercial paper to
The date of the previous rating action on AG Insurance's and Fortis
Group's ratings was on 13 February 2009, when Moody's placed Fortis's
ratings on review for possible downgrade.
The principal methodologies used in rating AG Insurance, Fortis
SA/NV, Fortis NV and Fortis's funding vehicles are "Moody's Global
Rating Methodology for Property and Casualty Insurers" and "Moody's Global
Rating Methodology for Life Insurers", which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies sub-directory. Other methodologies and factors
that may have been considered in the process of rating these issuers can
also be found in the Credit Policy & Methodologies directory.
Headquartered in Brussels, Belgium, and Utrecht, the
Netherlands, Fortis Group had total assets of EUR92.9 billion
and reported shareholders' equity (including minority interest) of EUR7.3
billion as of 31 December 2008.
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's confirms AG Insurance's (formerly Fortis Insurance Belgium) A2 IFSR, downgrades Fortis Holdings' issuer rating to Baa3
Financial Institutions Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454