Aegon and Allianz: Favorable Outlook for Some European Insurers

Zacks senior analyst Duong Vuong, CFA recently caught us up on what he is expecting from the European insurance companies in the quarters ahead. He also gave us a couple Buy recommendations on companies in this group.

You cover European insurers. Are there any Buys you’d currently recommend?

Aegon N.V. (AEG) is one of the largest insurers in Europe and is a significant player in the US. As Aegon is focusing mostly on life insurance, its position in the market is more favorable compared to non-life insurance companies, many of which are going through tough times currently.

While the current environment will be challenging for investment portfolios, fundamentally little has changed, as the company is not facing capital shortage and the value of new business has increased by 20%. We think that at its current multiple, the stock is at a significant discount to its peers. Our six-month target price is $20.00.

The company has also further strengthened its distribution channel in Spain and is entering new growth areas such as Mexico, India and China. In China, the number of employees is now 1497 (including 900 agents) which are more than the number employed in Canada (692). While revenues from China will take some time to match that of the Canadian business, we think the company is right to position itself early for what is a very large potential market for overseas companies.

What is your outlook for the insurance industry in Europe, overall?

Our outlook for the insurance industry is neutral. In the property/casualty insurance segment, sharp premium rate increases in the past few years have translated into strong increases in premiums and underwriting income, which we are now witnessing in the results of companies we cover.

However, with higher profitability due to higher premiums and benign losses, the industry's capital has built up. This should lead to increasing pricing competition going forward, particularly with the moderate loss trends on both the commercial and personal sides. Slower premium growth will eventually translate into slower earnings growth for the industry.

Our outlook for the life insurance segment is slightly more positive, especially for the companies that sell variable life and annuity products. A rising equity market should lead to increasing sales of variable products. The relatively low interest rates and steep yield curve are also favorable for the margins of fixed income products.

Are you bullish on any other companies in this space at this time?

Yes. Allianz (AZ) is one of the oldest and largest insurers in Europe, as well as a top insurer worldwide. As such, we believe that the company has the reputation and financial strength to withstand any major slow down. Despite the uncertainty about the banking operations, Allianz’s other units performed well, and the company plans to increase its dividend by 45% from 3.80 ($0.56/ADR) to 5.50 ($0.80/ADR).

At its current price, valuation is undemanding as the stock trades at a significant discount to its peers. Our target price is $22.00.

What about other big names in European insurance, such as AXA?

We are maintaining our Hold recommendation on AXA (AXA) after its year-end results. Most business units are performing well, and AXA is expected to continue its momentum in 2008. However, the macro environment at the start of 2008 has been challenging, and compared to its peers, AXA is fairly valued.

Duong Vuong, CFA is a senior analyst covering the European insurance industry for Zacks Equity Research.

Comments

[User 194060]

Zacks may be right about AEG's potential and AXA has had several good years but now looks set to follow the market. Allianz continues to be burnt over its Dresdner fiasco. A fire sale could remedy that. On the other hand, by my humble calculation it appears that core income without the cloud of sub-prime (probably largely reversable in the near future) and prior year capital gains actually doubled from prior year. Not shabby in this industry. The guidance is still firm and the dividend over 4% looks extremely handsome. Can't believe this price will stay so low, Dresdner or no Dresdner. Should see $24-26 before year-end.