Fortis has finalised its strategic review, which began in May of this year, immediately following the approval by shareholders of the transactions with BNP Paribas, Fortis Bank and the Belgian State. The key elements of this strategy are:
- Fortis is in a strong position to prosper as an international insurance group, excelling in partnerships in Europe and Asia
- Current capitalisation levels, which are among the strongest in the industry, are deemed appropriate in the current circumstances
- About half of the capital of the General Account is considered to be discretionary capital. Part of this will be reserved for prudential reasons; the remainder could be allocated to a number of potential investments. Fortis does not intend to buy back the hybrid instruments issued at this stage
- Fortis intends to resume payment of a regular annual cash dividend of 40% to 50% of the net profit of the insurance activities
- Fortis will continue to proactively manage the legacy issues in order to maximise long term value. A Public Offer on the EUR 1.0 billion outstanding debt of Fortis Finance was announced on 24 September
Bart De Smet, CEO of Fortis, summarizes:
“After the significant changes that have happened over the last year Fortis has regained stability. The strategic review was an important exercise, which allowed us to review in detail where we are today and where we want to be in the future. Management is committed to delivering a solid performance, combining profitability and growth, measured against a set of
key performance indicators. We will provide an update of our performance in 2009 in relation to these indicators when we publish our full year 2009 results. Having completed this strategic review I feel very confident that we are well positioned to continue to build our franchise as a solid and conservatively managed international insurer with a good balance between stable cash generative activities and exciting growth opportunities built on our well established expertise and partnership skills.”
Fortis reports outcome of strategic review
Fortis is in a strong position to prosper as an international insurance group
The solid results over the first half year 2009, which were published on 27 August 2009, have demonstrated that Fortis is a sound international insurance group, with a strong capital position, a conservative risk profile, motivated employees and a resilient commercial performance, notwithstanding the challenging market circumstances and the uncertainty resulting from the 2008/2009 events.
Fortis will continue to capitalize on its strong market position in the stable and cash generative core markets in which it is a leader. It will use its recognised expertise and partnership skills to grow further in a focused number of markets in Europe and Asia, primarily through partnerships with leading distributors. Fortis thereby aims to achieve an appropriate balance between profitability in mature markets and value creation in growth
markets. While Fortis’ first priority is to improve the profitability of its existing operations, Fortis also expects to generate significant top line growth organically as well as through the specific growth initiatives already identified.
Fortis will streamline the current portfolio to ensure that, over time, all businesses;
* are able to reach a critical size
* make a meaningful contribution to Fortis’ insurance earnings
* generate returns exceeding its cost of equity
The cost of equity is currently estimated at 11% and will be adjusted upwards, when appropriate, to take into account the specificities of each business. Fortis will only consider acquisitions that meet these stringent criteria and where it has a competitive advantage due to its existing market presence or because of its ability to secure a strong partnership with a leading distributor such as Tesco in the UK or UBI Banca in Italy. The latter initiative is also a testimony to the constructive relationship that Fortis is developing with its partner BNP Paribas.
Fortis remains confident in the strength of the multi channel distribution model which continues to perform strongly both in Belgium and in its other markets.
Current capitalisation levels, which are among the strongest in the industry, are considered as appropriate in the current circumstances
Through a bottom up review of the capital requirements for each of the individual businesses Fortis has determined that, for the time being, the current capitalisation is appropriate. The current capitalisation, a solvency level of 229% (including VOBA) of the regulatory minimum, is higher than that of industry peers. Fortis believes this to be justified particularly in the wake of such an unprecedented period of uncertainty in the past year and it demonstrates to customers and other stakeholders the company’s commitment to remain one of the best capitalised insurance companies in Europe.
The current capitalisation levels reflect the specific characteristics of each of its businesses including the commitments resulting from agreements with its partners. Retaining a strong capital base in the individual insurance operations is also necessary in order to fund the capital requirements resulting from the significant organic growth that is planned while satisfying the local rating and solvency requirements.
Fortis expects to maintain a minimum aggregate solvency ratio of 200% of the regulatory requirement. A further review of the capital requirements in each of its businesses could lead to a revision of this target in the future and a possible release of capital over time, although no such review is expected to take place before the introduction of Solvency 2 (expected 2012).
About half of the capital of the General Account is considered to be discretionary capital. Part of this will be reserved for prudential reasons; the remainder could be allocated to a number of potential investments. A buy back of the hybrid instruments issued is not currently intended.
Fortis estimates it has within the General Account approximately EUR 1.3 billion of discretionary capital1.
Fortis will retain this amount for the time being in order to have sufficient resources to fund potential investments providing these meet the stringent strategic and financial criteria, as well as to retain a prudential buffer in view of the remaining uncertainties, including legal matters on which there is currently little visibility. Fortis will continue to assess the appropriate level of the self imposed buffer.
Fortis does not intend to buy back the hybrid instruments issued at this stage.
Fortis intends to resume payment of a regular annual cash dividend of 40 % to 50% of the net profit of the insurance activities Fortis intends to pay a regular annual cash dividend based on the profit of the insurance activities. Fortis has a target dividend pay-out ratio of 40 % to 50% of the net profit of the insurance activities. The exact level will be dependent on the circumstances at the time, in particular the status of growth plans and the resources available to finance these. This policy will allow shareholders to benefit fully from the cash generative activities of
Fortis while still being able to enjoy long term value creation in growth markets.
Once the uncertainties regarding the legacy issues and the current market conditions are lifted and, to the extent Fortis considers it has discretionary capital available, Fortis is committed to investigate the most appropriate way to use this capital to create shareholders value.
In line with previous communications, Fortis will propose to its shareholders to distribute in the form of an additional dividend the advantage gained from the exercise or monetisation of the BNP Paribas call option granted by the Belgian state.
Fortis will continue to proactively manage the legacy issues in order to maximise long term value
Fortis has taken a number of initiatives to manage the legacy issues and adjust its structure and balance sheet to the requirements of a focused insurance group. In that context a public offer by Fortis Finance on the EUR 1.0 billion of outstanding debt under the European Medium Term Notes (EMTN) programme and the Inflation Linked Notes was announced
on 24 September. These financing structures (including the Notes) are no longer in line with the new objectives of the General Account. The public offer will be made at the same price as the early redemption procedure that Fortis announced on 8 December 2008.
Fortis has also decided not to take up a EUR 760 million tranche of the EUR 1.0 billion loan facility provided by BNP Paribas Fortis Bank, with a guarantee of the Belgian state, to refinance the acquisition of the equity stake in Royal Park Investments. Fortis' capital structure is sufficiently sound for Fortis not to rely any more on financial support from the Belgian State, especially as such support relates to funding of a relatively short tenure.
Fortis will continue to proactively manage legacy liabilities and assets in a way that maximises long term value creation without imposing on itself any artificial deadlines. As shown in the results published on 27 August, Fortis has disclosed all known legacy assets and liabilities in a transparent way.
The investment portfolio of the insurance activities remains of high quality and reflects a pro-active approach to asset and liability management
The equity component of the investment portfolio is currently 2%. The investment grade instruments account for 98% of the bond portfolio. The real estate assets are of high quality and their values have not been impaired. While the insurance activities did account for a number of write downs and impairments over the last year as a result of the unprecedented financial crisis, the level of these losses has remained relatively low. This emonstrates the pro-active approach of the insurance entities towards asset and liability management (ALM) and their strong ALM expertise.
A new management structure is now in place
To reflect the company's new profile, Fortis recently announced a new organizational structure based on a lean Executive Committee and a Management Committee including the CFO and the CEOs of the four regions (Belgian, UK, Continental Europe and Asia).
Management is committed to delivering a solid performance, combining profitability and growth, and measured against a set of key performance indicators reflecting the nature (mature/growth) of the businesses, such as Return on Equity, top line growth, cost ratio, combined ratio Non-Life, Embedded Value, etc. An update of the performance in 2009 in relation to these indicators will be provided at the time of publication of the full year 2009 results.
In parallel, Fortis is studying the best way to simplify the current legal structure of the group.
Branding
As BNP Paribas has acquired the Fortis brand name, Fortis Group can only use the Fortis brand until May 2011. Fortis has thus started the process of developing a new brand name for the group.
Investor Day
Fortis management will present the results of the strategic review to investors and analysts at an Investor Day in Brussels. All presentations can be viewed live via www.fortis.com .
- Ends -
Notes to Editors
With insurance as core business, Fortis (www.fortis.com) employs over 10,000 people in in Belgium and internationally. Its four key markets are Belgium, the United Kingdom, Continental Europe and Asia.
Fortis's 75%-owned subsidiary AG Insurance is the long-established leader in its domestic Belgian Life and Non-Life insurance markets. It is also a leading player in the Employee Benefits segment.
Outside Belgium, the wholly-owned subsidiary Fortis Insurance International is active in the three other markets through direct subsidiaries, joint ventures and local partnerships. Fortis is set to become the second largest motor
insurer in the UK and the company is also applying its know-how in Asia to build high value-added partnerships.
In 2008, 54% of Fortis's insurance revenues were generated by the Belgian market and 46% by the three other markets.
Fortis additionally holds a 45% interest in the structured credit portfolio entity Royal Park Investments, and is the 100% owner of several financing vehicles, of which it manages the assets and liabilities.
The company is listed on Euronext (Brussels - Amsterdam).
Fortis's robust commitment to social responsibility is expressed through the activities of its Fortis Foundations, which are dedicated to philanthropy and promoting volunteer work.
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