2q09 results wrap-up
DESCRIPTION
EQUITY RESEARCH SECURITYTRANSCRIPT
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US investors enquiries should be directed to Santander Investment Securities Inc. (SIS) at (212) 692-2550. US recipients should note that this research was produced by a non-member affiliate of SIS and, in accordance with NASD Rule 2711, limited disclosures can be found on the back cover.
European Equity Research FLASHNOTE Europe InsuranceMadrid, August 14, 2009
INSURANCE SECTOR
2Q09 Results Wrap-Up Valvanera Gmez Pastor (34) 91 289 3047 [email protected]
SUMMARY. 2Q09 results were better than 1Q09, which may confirm that we have bottomed out and are on the rebound. Contrary to the in line numbers we saw in 1Q09, this time we have seen both positive and negative surprises. In our view, traditional insurers have been positively affected by the performance of the financial markets, while those with higher exposure to MBS (mortgage backed securities) in their portfolios have fallen short of market expectations. The top line is still weak, posting a 3.6% drop vs -2.0% 1Q09. 2Q09 average EPS fell by 9.6% YoY vs -63% in 1Q09. The financial markets are likely to be the deciding factor in 3Q09.
Improvement in solvency ratios vs stable figures in 1Q09. As we expected, the strength of the financial markets provided an additional buffer during 2Q09. Of the insurers that released solvency ratios, Catalana and Munich Re showed the strongest improvement (9% and 8%, respectively) vs 1Q09. Axas solvency ratio was above expectations, unlike Allianz, which released a flat figure vs 1Q09 due to some asset reclassifications that came as quite a disappointment.
Investment portfolio. We analysed the most controversial assets. According to the information released, exposure to equity markets has increased slightly, mainly due to higher valuations. Regarding corporate bonds, however, it remains stable. ING was the only insurer to reduce its ABS portfolio further, from 18.22% to 14.42%, while the rest of the companies posted stable exposure. These conservative policies once again led to a reduction in investment yields, from 1.09% in 1Q09 to 0.88% 2Q09.
Costs and profitability. Contrary to what we saw in the 1Q09 numbers, the cost-to-net premiums ratio increased in 2Q09 compared to 1Q09, from 27.4% to 28%. This is mainly due to the increase in acquisition costs the companies are facing. We think higher acquisition costs could persist throughout the year, as the recession will force competitors to make bigger selling efforts. Profitability, however (measured as operating profit divided by net premiums), rose from 2.9% 1Q09 to 7.5% in 2Q09 owing to the good performance of the financial markets in the second quarter. This time Munich Re was the company with highest profitability levels (13.55% vs 8.29% 1Q09), with MAP coming in second (10.7% vs 12.9% in 1Q09). These two were followed by two other European players: Generali (9.2% vs 6.26%), the only company to improve its cost-to-net premiums ratio by 30bp, and Allianz (8.92 vs 9.2% 1Q09).
INVESTMENT ACTION. The 2Q09 numbers reinforced our more positive view on the sector. We think the lower volatility in the P&L account and balance sheet, as well as the additional capital buffer generated (which would help insurers in the vent of further market downturns) could be valued positively by the market. The negative issue we see remains the same: we think profitability will remain under pressure. The sector is trading at 0.8x 2010E P/BV, offering a 13.8% 2010E ROE. Also, if the financial markets finally stabilise, we think there is room to upgrade our estimates. We maintain Allianz and Axa as our top picks.
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2
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2 08
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2 09
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1 09
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2 09
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Sour
ce: C
ompa
ny d
ata,
San
tand
er E
quiti
es(*
) Dat
a fo
r sol
venc
y ra
tio, a
vaila
ble
capi
tal o
ver l
egal
requ
irem
ents
and
inve
stm
ent p
ortfo
lio re
late
d to
YE
2008
(**)
Dat
a fo
r 1H
08 a
nd 1
H09
exc
ept f
or p
rem
ium
s w
hich
are
qua
terly
dat
a(*
**) F
or IN
G m
orga
ges,
for c
orpo
rate
s cu
rrent
ly s
tand
s at
3,1
% v
s 2.
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Q09
.
Sect
or a
vera
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ener
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ich
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Map
fre*
Cat
alan
aAx
a**
Allia
nz
-
Important Disclosures ANALYST CERTIFICATION: I, Valvanera Gmez Pastor, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been promised compensation either directly or indirectly for expressing the recommendation in this report.
This report has been prepared by Santander Investment Bolsa, Sociedad de Valores, S.A. (Santander Investment Bolsa) and is provided for information purposes only. This document must not be considered as an offer to sell or a solicitation of an offer to buy. Any decision by the recipient to buy should be based on publicly available information on the related security and, where appropriate, should take into account the content of the related prospectus filed with the CNMV (Spanish National Securities Market Commission) and available from the CNMV, the company governing the related market (Sociedad Rectora de la Bolsa) and the company issuing the security. This report is issued in the United States by Santander Investment Securities, Inc. (SIS), in Spain by Santander Investment Bolsa and in the United Kingdom by Banco Santander, S.A., London Branch (Santander London). Santander London is authorised by the Bank of Spain. SIS, Santander Investment Bolsa and Santander London are members of Grupo Santander. This report is not being issued to private customers. The information contained herein has been compiled from sources believed to be reliable, but while all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, we make no representation that it is accurate or complete and it should not be relied upon as such. All opinions and estimates included herein constitute our judgement as at the date of this report and are subject to change without notice. Santander Investment Bolsa may change the recommendation it has on a stock at any given time. It may also cease to cover a stock or initiate coverage of new stocks. There is no specific calendar for any such actions. From time to time, Grupo Santander and/or any of its officers or directors may have a position, or otherwise be interested in, transactions in securities which are directly or indirectly the subject of this report. Santander Investment Bolsa has internal rules of conduct that contain, among other things, procedures to prevent conflicts of interest with respect to recommendations, including: the consideration of its Research Department as a separate area, Chinese Walls, and the possibility of establishing specific restrictions on research activity where appropriate. Santander Investment Bolsas research reports contain a certification stating that they reflect the authors own opinions. Grupo Santander may from time to time perform services for or solicit business from any company mentioned in this report. Neither Grupo Santander nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose. Santander Investment Bolsa is under the supervision of the CNMV. Any US recipient of this report (other than a registered broker-dealer or a bank acting in a broker-dealer capacity) that would like to effect any transaction in any security discussed herein should contact and place orders in the United States with the company distributing the research, SIS at (212) 692-2550, which, without in any way limiting the foregoing, accepts responsibility (solely for purposes of and within the meaning of Rule 15a-6 under the US Securities Exchange Act of 1934) under this report and its dissemination in the United States. US recipients of this report should be advised that this research has been produced by a non-member affiliate of SIS and, therefore, by rule, not all disclosures required under NASD Rule 2711 apply. Santander Investment Bolsa, Sociedad de Valores, S.A., 2009. All Rights Reserved.
KEY TO INVESTMENT CODES* % of Companies Rating
Definition
Covered withThis Rating
Provided with InvestmentBanking Services in Past 12M
Buy Upside of more than 15%. 48.41 51.72Hold Upside of 10%-15%. 16.56 17.24Underweight Upside of less than 10%. 28.66 27.59Under Review 3.18 3.45NOTE: Given the recent volatility seen in the financial markets, the recommendation definitions are only indicative until further notice. (*) Target prices set from January to June are for December 31 of the current year. Target prices set from July to December are for December 31 of the following year.
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