>>> Top Picks :
1. Aviva (Buy) –Inexpensively valued relative to its peers.
2. Axa (Buy) –Strong earnings and dividend growth over 2012-15E.
3. Prudential (Buy) – Asian growth story, focus on cash, and the prospects of
optionality make it a outperformer.
4. St. James’s Place (Buy) – Differentiated business model ,and strong
dividend growth merit holding the stock.
5. Swiss Life (Buy) – One of the key beneficiary from rising interest rates,
rising dividend payout supported by improved balance sheet.
>>> Selected Reduce ratings
1. Baloise (Reduce) – As good as it gets.
2. Munich Re (Reduce) – Lack of catalyst post buyback announcement,
earnings outlook negative as pressure on rates continues.
3. Generali (Reduce) – Balance sheet still stretched and over-levered given
payment of second tranche for CEE buyout coming up; premium valuation
not warranted.
4. Scor (Reduce) – Current valuation reflects its return potential, bleak rates
outlook makes further outperformance unlikely.
5. VIG (Reduce) – Issues in CEE are continuing to weigh on results.
6. Zurich (Reduce) – Lack of earnings momentum, premium valuation.
>>> Dividends, interest rates, and non-life pricing, the key themes
- Post a number of years of underperformance, the European insurance sector
outperformed the market by 20% in 2012 and 12% in 2013.
- After this outperformance, we think the sector is fairly valued, and for 2014
further outperformance looks unlikely. This brings back focus to stock picking.
- On a P/E basis, the sector is trading at 10x 12m FWD P/E and is cheaper than
the market, but this has to be seen in the context of 6.6x 12m FWD P/E in
May 2012.
- Since the financial crisis in 2008, the sector has witnessed a number of key
themes/concerns coming into focus - peripheral European sovereign debt
crisis, stubbornly low interest rates, and Solvency II – to name a few.
- For 2014 (and beyond) we think the following three themes will be in focus,
and drive stock performance.
- Dividends: Current dividend yield as well as the potential of dividend
growth (positive capital surprises have been rewarded).
- Interest rates: In a rising interest rate scenario, life insurers should benefit.
- Non-life pricing: A mixed effect of factors such as underwriting
profitability, muted economic growth, increasing competition, increased
flow of non-traditional capital into reinsurance , and regulatory interventions
is set to mute the broad non-life pricing outlook .
- We expect non-life reinsurance rates to continue to be under pressure
as renewal seasons progress.