Investor Day 2009 - Deputy CEO presentation

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Capital management, a balanced approach to ensure growth while respecting capitalization and liquidity constraints Deputy CEO presentation

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Page 1: Investor Day 2009 - Deputy CEO presentation

Capital management, a balanced approach to ensure growth while respecting capitalization and liquidity constraints

Deputy CEO presentation

Page 2: Investor Day 2009 - Deputy CEO presentation

FORTIS I 9/25/2009 I page 2

Agenda

1. Insurance businesses

2. General Account

3. Capital Management and Dividend Policy

4. Conclusion

Page 3: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Reminder: key figures first half year 2009

H1 09 H1 08 Change H2 08

Net profit Insurance before minority interests

Net profit attributable to minority interests

Net profit Insurance after minority interests

Net profit General (incl. eliminations)

Net profit after minority interests

Net result on discontinued operations

Net profit attributable to shareholders

Weighted average number of shares (mio)

Earnings per share (EUR) **

Net equity per share (EUR)

Net shareholders’ equity (as per 30 June 09)

AG Insurance

Fortis Insurance International

General (incl. eliminations)

* Of which EUR 534 related to closing transactions with BNP Paribas, the Belgian State and Fortis Bank, as well as a tax charge related to the legal dispute with Fortis Capital Company Ltd

** Based on average number of outstanding shares

263

35

228

658

886

-

886

2,475

0.36

3.11

7,686

2,328

2,616

2,742

350

31

319

(294)

25

1,613

1,638

2,195

0.75

12.48

(25%)

13%

(29%)

(46%)

13%

(52%)

(75%)

(319)

(6)

(313)

(322)

(635)

(29,025)

(29,660)

2,396

(12.38)

2.75

EUR mio

includes EUR 1.3 bln of discretionary capital (see slide 12)

I page 3

*

9/25/2009

Page 4: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Reminder: special items in first half year 2009 results

H1 09 net result of EUR 658 mio (including eliminations), mainly due toEUR 697 mio: Capital gain on sale 25 +1 share AG Insurance to Fortis BankEUR 301 mio: Net-of-tax charge related to legal dispute with FCC Ltd

Impact of elements related to transactions closed on 12 May 2009EUR 482 mio: Valuation call option related to BNP Paribas sharesEUR 344 mio: Fair value future quarterly interest payments related to Relative Performance Note EUR 760 mio: Equity investment in Royal Park Investments

Net cash position General on 30 June 2009 of EUR 3.0 bnAssuming full redemption EMTN programme and Inflation linked Notes; EUR 1.0 bn outstanding at 30 June 2009

I page 49/25/2009

Page 5: Investor Day 2009 - Deputy CEO presentation

FORTIS I

390464 501

-150

214 184

174

20761

156

10544

History of stable underlying Insurance profits* (1)

Non-Life Insurance Life Insurance

* AG Insurance at 100% until 13 May 2009, thereafter 75%I page 5

2007 2008 H1 092005 2006 H1 08

6228

564

671

562

319

EUR mio

Life Insurance result is on average two thirds of total Insurance profitIn 2008, total impact of investment losses amounted to EUR 639 mio (AG Insurance EUR 534 mio, and Insurance International EUR 105 mio)In H1 2009 Life result impacted by higher negative impact of financial crisis and Non-Life result down due to weather related events and higher claims in motor and fire

9/25/2009

Page 6: Investor Day 2009 - Deputy CEO presentation

FORTIS I

History of stable underlying Insurance profits* (2)

Insurance International AG Insurance

* AG Insurance at 100% until 13 May 2009, thereafter 75%I page 6

488553 522

248 195

76

11840

71

33

AG Insurance forms a strong base for total Insurance net profitHigh recurrence of net profitNet profit 2008 impacted by investment losses (totaling EUR 639 mio) but Fortis Insurance remained profitableAG Insurance recorded H1 09 total negative net-of-tax impact on investment portfolio of EUR 82 mio, one-off tax recovery of EUR 94 mio

2007 2008 H1 092005 2006 H1 08

6

228

564

671

562

319

EUR mio

9/25/2009

Page 7: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Value creation in Fortis Insurance

Insurance International AG Insurance*

I page 7

Very adverse financial markets caused only limited decreaseAG Insurance upstreamed EUR 1.0 billion to the group during 04-08

Embedded Value development Fortis (in EUR mio) Examples of Value creation in Insurance International:

2004 2008

5,364 4,924

2006 2008

Embedded value development at TaiPing** (in bn HKD)

Embedded value development at Millenniumbcp** (in EUR mio)

626

995

2006 2008

4,214 3,817

1,1521,107

EUR mio

* AG Insurance at 100%** Embedded value at 100%; Taiping under local methodology; HKD/EUR 0.0873 at 22 September 2009

4.6

8.5

9/25/2009

Page 8: Investor Day 2009 - Deputy CEO presentation

FORTIS I

3.7

2.2

6.0

1.9

0.7

2.6

Strong capital position: 229% solvency ratio of Insurance Activities

AG Insurance Insurance International

TotalInsurance

194% 327% 229%

EUR 3.4 bnabove Minimum

Solvency Capital (Actual) Required Regulatory minimum (Minimum)VOBA

I page 8

EUR bn

Solvency targets of Fortis Insurance managed at Opco level

Strong solvency levels contribute to rebuilding of trust

Current capitalisation is strong and justified by anticipated growth, local stress tests, local rating, and other considerations (e.g. shareholder agreements)

Capital of JV’s in line with agreements made with partner

Fortis expects to maintain a minimum capital ratio of 200%

A further detailed review of the local capital models could lead to a revision of this target

200%

0.3Prudential buffer in present

circumstances

9/25/2009

Page 9: Investor Day 2009 - Deputy CEO presentation

FORTIS I I page 9

Ratings

AG InsuranceInsurance Financial StrengthOutlookLast change

MilleniumBCP FortisInsurance Financial StrengthOutlookLast change

Fortis HoldingsLong-termOutlookLast change

A+Stable

9-Jul-09

AStable

9-Jul-09

BBB+Stable

9-Jul-09

Fitch S&P

A-Stable

3-Aug-09

A-Stable

3-Aug-09

BBB-Stable

3-Aug-09

Moody's

A2Negative15-Jul-09

NR

Baa3Developing20-Jul-09

* Includes a.o. management contracts of public car parks9/25/2009

Page 10: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Recap Insurance activities

Insurance activities have history of stable underlying earnings

Life Insurance result is on average two thirds of total Insurance profit

Insurance activities are well balanced between profitability in more mature markets and value creation in growth markets

The Insurance activities are well capitalised, permitting to regain further stability following an uncertain period and allowing to develop additional growth

Fortis expects to maintain a minimum capital ratio of 200%

I page 109/25/2009

Page 11: Investor Day 2009 - Deputy CEO presentation

FORTIS I I page 11

Agenda

1. Insurance businesses

2. General Account

3. Capital Management and Dividend Policy

4. Conclusion

9/25/2009

Page 12: Investor Day 2009 - Deputy CEO presentation

FORTIS I I page 12

Balance sheet General Account: a view on liquidity and capital

Assets Liabilities

Cash & Cash equivalentsDue from Fortis Bank BelgiumOther

Royal Park InvestmentsCall option net of tax on BNP PPerpetual loan to AG insurance

Total

4.20.90.5

0.80.50.1

6.9

ST (EMTN (1.0) + Bank (0.2))NITSH I & NITSH IIRPN(I)OtherFRESHNet equity

Total

1.20.90.40.51.22.7

6.9

Net Cash: EUR 3 bnPassed on

LT assets & LT liabilities

Discretionary Capital on balance sheet

Shareholders equity + FRESHInvested in non-current assets on balance sheet

Total CapitalContingent asset off balance (Fortis Bank Tier 1 loan, due Sept 2011)Already committed to projects (Tesco JV and Italy)

Discretionary Capital * (if available in cash)

3.91.42.51.00.21.3

EUR bnEUR bnEUR bnEUR bnEUR bnEUR bn

EUR bn, 30 June 2009

* Fortis defines discretionary capital as the lower of the available cash and total capital of the General Account corrected for (contingent) illiquid assets and existing investment commitments

Part of discretionary capital will be reserved for prudential reasons in order to ensure liquidity at all timesThe remainder might allow a number of potential investments currently under consideration and aimed at creating value

9/25/2009

Page 13: Investor Day 2009 - Deputy CEO presentation

FORTIS I

General account is carefully managed for value

Equity and liquidity carefully monitored

General Account contains optionality:

On Balance:Value of BNP Paribas option (EUR 482 mio, net of deferred tax liability)

Stake in Royal Park Investments (EUR 760 mio)

Prudent approach adopted, no value included in balance sheet for:

Claim on payment of EUR 301 miopost-tax to holders of Fortis Capital Company

Future compensation for exchange of MCS

Litigation: Litigation is contingent liability

Part of discretionary capital reserved for future uncertainties

I page 139/25/2009

Page 14: Investor Day 2009 - Deputy CEO presentation

FORTIS I

BNP Paribas Fortis Bank loan and public offer on Fortis Finance debt

Fortis will not take up a EUR 760 mio tranche of a EUR 1.0 bn loan facility provided by Fortis Bank

‒ Facility was granted to refinance acquisition of equity stake in Royal Park Investments

‒ Fortis had until end of September to decide

‒ Taking up this facility would have impacted net interest income negatively and would only temporarily have provided additional liquidity

‒ Fortis has until May 2010 to decide on the remaining EUR 240 mio facility

Public offer by Fortis Finance on the European Medium Term Note programme and Inflation Linked Notes announced on 24 September

‒ Amount outstanding at 30 June 2009: EUR 1 bn

‒ Public offer at the same price as the early redemption procedure announced on 8 December 2008

‒ Positive effect on interest income due to high fixed coupon

I page 149/25/2009

Page 15: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Profile of General Account

Net interest income is dependent on investment profile of the net cash position

Successful public offer on EMTN programme and Inflation linked Notes should increase net interest income

Volatility in Treasury and Financial markets mainly driven by the BNP Paribas call option and RPN(I)

Excluding volatile items, results will depend on the investment policy for the net cash position. If invested in bonds, higher net interest income could result in a slightly positive net result

I page 159/25/2009

Page 16: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Recap General Account

Discretionary capital of EUR 1.3 bn. Discretionary capital is the lower of the available cash and the total capital of the General Account corrected for (contingent) illiquid assets and existing investment commitments

‒ Fortis will need to reserve part of the discretionary capital for unexpected events in order to ensure liquidity at all times

‒ The remainder might allow a number of potential investments aimed at creating value currently under consideration

Fortis will not take up a EUR 760 mio tranche of a EUR 1.0 bn loan facility provided by BNP Paribas Fortis Bank

Announcement of public offer on the European Medium Term Note programme and Inflation Linked Notes on 24 September

Objectives:‒ To carefully manage the General Account for value.

Equity and liquidity closely monitored‒ To optimize capital and liability management ‒ To resolve the legacy issues

I page 169/25/2009

Page 17: Investor Day 2009 - Deputy CEO presentation

FORTIS I I page 17

Agenda

1. Insurance businesses

2. General Account

3. Capital Management and Dividend Policy

4. Conclusion

9/25/2009

Page 18: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Capital Management: allocation of capital

I page 18

A balanced approach to ensure organic and external growth while respecting capitalization and liquidity constraints

Invest in businesses

Pay dividend

Shares buy-back (is EPS accretive)

Lowering of cash position could pose liquidity risk

Strategic flexibility reduced

Return to shareholders

Buyback of debt

Limited amount of debt:NITSH I & II, Hybrone and FRESH

Potential increase in NAV

Positive carry in P&L

Also, lowering of cash position could pose liquidity risk

Strategic flexibility reduced

Return to debt holders

Support organic growth

To selectively acquire

1) To strengthen current Businesses

2) To create new partnerships

3) Explore opportunities with BNP Paribas

Find the right balance between risk (including liquidity risk) and return

9/25/2009

Page 19: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Ranking of employment of Capital

Determine amount of discretionary capital that can be invested, leaving enough buffer to cope with volatility reduces the risk of forced sales

Investment in businesses should be preferred as long as returns on investments are expected to exceed cost of equity

If no investment opportunities in businesses are envisaged or possible, one should start to redeem capital with highest cost, being equity

Key investment criteriaCritical size

Meaningful contribution

Return in excess of cost of equity while taking into account the specificities of the business

When evaluating the return generation and the profit contribution of growth businesses, the expected value creation will also be taken into consideration

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Fortis does not intend a buy back of hybrid instruments at this stage

9/25/2009

Page 20: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Profile of expected free cash flows of Insurance businesses

I page 20

Net profit Capital requirement

AG Insurance Cont. Europe UK Asia

Available for regular dividendCash flows

Dividend target is to pay-out 40% to 50% of the net profit of the Insurance activities

Continental Europe and UK finance the growth of Asia

9/25/2009

Page 21: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Dividend policy

Fortis is committed to pay a dividend in cash for book year 2009 as communicated in May 2009

Future regular dividend streams will depend on cash generation of insurance activities

Dividend policy objectives:

‒ Payment in cash

‒ Annual payments

Fortis targets to pay out 40% to 50% of the net profit of the insurance activities

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Page 22: Investor Day 2009 - Deputy CEO presentation

FORTIS I I page 22

Agenda

1. Insurance businesses

2. General Account

3. Capital Management and Dividend Policy

4. Conclusion

9/25/2009

Page 23: Investor Day 2009 - Deputy CEO presentation

FORTIS I

Conclusion

Strong recurring insurance profits

Strong capital position of insurance activities is justified in present circumstances

A further detailed review of the local capital models of the insurance activities could lead to a release of capital over time. A minimum solvency ratio of 200% is expected to be maintained

Carefully managed General Account could include substantial upside

Part of discretionary capital in General Account aims to be invested in businesses to enhance shareholder value

Dividend policy to a target pay-out of 40% to 50% of the net profit of the Insurance businesses

I page 239/25/2009