S&P Capital IQ’s latest European Insurance equity research report identifies the insurance sector as well placed to perform in 2012–outside of macro risks. Given this stance, its sector recommendation is Overweight.
Insurers are categorised in the report as either "Nomads" or or "Farmers". The Nomads: Prudential, Generali and Zurich Financial Services, stand out as the life insurers who are most visibly generating a level of new business profit that should provide growth. They have successfully moved with the markets in terms of product and/or geography and may be in good positions to attack new markets.
These can be contrasted with the ‘Farmers’: Axa, AEGON, Allianz, Legal and General and Standard Life may have seen growth in new business within existing products but are heavily dependent on farming legacy products or markets to support current levels of life IFRS profits. They would struggle, in the absence of a significant uplift in new business profits, to report a progressive life IFRS profit profile over time.
Consistent with the Nomad/Farmer analysis, S&P Capital IQ has a Buy on ZFS (upgraded from Hold on January 25), as it sees a high growth life activity alongside recovering non-life profit which is not reflected in valuation. It has a Hold on Aegon (downgraded from Strong Buy on January 25) as it does not believe the company offers relative value following recent share price performance. S&P Capital IQ has a Hold on Allianz (downgraded from Strong Buy on January 25). Though Allianz’s P/E is low range in a sector context, it’s hard to envisage the stock outperforming the sector unless emerging market exposure becomes more prominent and interest rates rise.
Tony Silverman, S&P Capital IQ Equity Analyst said: “Although the sector had a slightly disappointing end to 2011, it has started 2012 well gaining 6% relative to the wider European equity market in the year to date (31 January). Unlike banks, the sector is not, in our opinion, facing fundamentally more demanding regulatory capital requirements. So much so it is possible that changes to proposed industry solvency regulation “Solvency 2” will be positive. High dividend yields are, broadly, sustainable though there are cases with grounds for a degree of concern, earnings multiples are undemanding, and operating earnings themselves are showing progress. On this basis we expect the sector to modestly outperform in 2012 before the impact of macro risks.”
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