The world has changed; the banking
crisis is affecting the real economy –
growth is slowing, corporate bond
defaults will rise and asset markets will
remain volatile.
􀀗 Insurers will find it difficult to perform in
this environment – investors that ‘must’
own insurance should consider
Admiral, Alleanza, AXA, L&G and ZFS
(all rated Overweight (V)).
􀀗 We downgrade AEGON, Mediolanum
and Standard Life to Underweight (V).
We also downgrade Aviva, Banca
Generali, Fondiaria-Sai and Prudential
to Neutral (V).
Fundamentals: Although the sector remains adequately
capitalised, capital buffers have been eroded in the three
months since our last report and the prospect of insurance
rights’ issues can no longer be ignored. In our bear case, we
estimate the sector requires EUR10bn for capital levels to
remain consistent with an A rating and EUR21bn to raise
capital levels to an AA rating. While we are not overly
concerned about liquidity or asset-liability management at
the sector level, we are increasingly nervous about the
potential impact of lower and more volatile equity markets,
rising corporate bond defaults, DAC unlocking and
spiralling hedging costs on thinner capital buffers. The
conversion of already accumulated significant unrealised
ABS losses presents a further challenge to solvency.
Valuation: Insurers offer deep value on most conventional
metrics – P/EV, PE and dividend yields – in absolute and
historic terms. But, valuation has ceased to be a share price
catalyst for some time. We have reduced most of our price
targets in this note and all stocks are now classified as volatile.
Catalysts: We struggle to see positive catalysts in the
coming months, other than a sustained equity market rally.
As the financial crisis morphs into a broader economic crisis,
fears about insurers’ sales prospects, earnings and solvency
are unlikely to disappear and overly optimistic consensus
estimates will fall.