ANADOLU SIGORTA (ANSGR.IS) Outperform

ANADOLU SIGORTA (ANSGR.IS)
Outperform
COMPANY UPDATE
Current / 2007-end Target Price:YTL2.96/4.50
Anadolu Sigorta (2006-2007)
4.0
1.50
3.5
1.25
YTL
3.0
1.00
2.5
2.0
0.75
1.5
0.50
03/07
02/07
01/07
11/06
10/06
09/06
08/06
07/06
05/06
04/06
03/06
02/06
01/06
ANSGR
Relative to ISE (rhs)
STOCK MARKET DATA (18 April 2007)
Relative Performance
1 mth
3 mths
-3.6%
11.4%
52 Week Range (YTL):
Market Cap (mnYTL):
Average Daily Vol (US$mn) 3 mths:
YTD US$ Return (%):
Shares Outstanding (mn):
Free Float:
12 mths
-9.6%
1.5 - 3.3
592
13.9
33.1
200
48%
Premiums
2000
mn YTL
1000
500
0
2006
2007E
2008E
Shareholding Structure
Türkiye Is Bankası
35.53%
Milli Reasurans
21.78%
Other
42.69%
FIGURES & FORECASTS
Earned
Premium
(YTLmn)
2005
2006
2007E
2008E
543
683
827
1,034
♦ 2007 set to be a better year in terms of operational
performance. Anadolu Sigorta generates 21.4% of its
premiums from fire branch, generally, one of the most
profitable branches with a low claims ratio. However,
the large scale fire at Trakya Cam in 2006 resulted in
a fall in technical profit. We expect an improvement in
technical profitability in 2007.
♦ Valuations of recent insurance sector M&A deals
raise prospects of a re-rating in the industry. The
stake sales in Genel Sigorta, Ray Sigorta, Garanti
Sigorta, and Garanti Emeklilik at high valuations, and
Ak Emeklilik’s merger with Aviva clearly indicate that
global insurance companies expect to see high
growth rates in the Turkish insurance market going
forward, which is also likely to give rise to a re-rating
of the insurance stocks currently trading on the ISE.
Anadolu Sigorta is not an immediate acquisition target, but with its high market share and cheap valuation, the Company would benefit considerably from
such a re-rating of the industry.
1500
2005
Anadolu Sigorta, the leading player in the Turkish
non-life insurance market with a 13.2% market share,
presents investors with an attractive opportunity to
gain exposure to the expected growth in the Turkish
insurance market. Trading at the cheapest multiples
of all the publicly listed insurance stocks, Anadolu
Sigorta stands out with its untapped top line and
earnings growth potential. Therefore, we reiterate
our “OUTPERFORM” rating for Anadolu Sigorta with
YTL4.50 price target.
♦ The Isbank branch network presents a clear competitive advantage, which has not yet been fully
utilized. Anadolu Sigorta only generates 15% of its
total premiums from Isbank’s extensive branch network, despite its organic ties with the bank, which is
Turkey’s largest bank. One of the company’s major
strategies is to increase its premium generation from
Isbank by locating its own sales force in branches in
rotation. We believe this will not only bolster Anadolu
Sigorta’s top line but also improve its profitability, as
bank customers are known to have better risk profiles.
♦ Anadolu Sigorta’s 20% stake in Anadolu Life presents a hidden asset. The recent valuation of Garanti Life and Pension Company’s stake sale indicate
that a re-rating in life insurance companies may also
contribute to Anadolu Sigorta’s valuation.
Technical
Profit
(YTLmn)
Net Profit
(YTLmn)
Combined
Ratio (%)
P/E
P/BV
P*/Premium
21
-15
21
32
40
25
54
73
95%
98%
94%
93%
14.8
23.7
11.0
8.1
1.3
1.2
1.1
1.0
0.7
0.6
0.5
0.4
P*: Adjusted price for participation portfolio
Research: +90 (212) 318 2730
Sales: +90 (212) 318 2741
ANADOLU SIGORTA (ANSGR.IS)
INVESTMENT CASE
Anadolu Sigorta boasts a rich participation portfolio with the value of its stakes from listed
participations reaching YTL276mn. Applying a 20% holding discount to this portfolio, and
including the YTL5mn book value of unlisted participations, we reach a total participation
value of YTL226mn for Anadolu Sigorta. Therefore, when adjusted for this large participation portfolio, the company’s current market cap prices in each 1% of the company’s market
share at a mere YTL28mn, suggesting an adjusted Price/ Earned Premium multiple of 0.5x
(or an Adj. Price/ Premiums multiple of 0.3x), looking very cheap when compared to both
the trading multiples of the listed peers and the multiples seen in recent M&A transactions.
Anadolu Sigorta is also trading at a deep discount to its peers in terms of its P/BV and P/E
multiples.
Domestic Comparison for Listed Insurance Companies
Company
Aksigorta
Anadolu Hayat
Anadolu Sigorta
Aviva Sigorta
Gunes Sigorta
Ray Sigorta
Yapı Kredi Sigorta
Ticker
Price (YTL)
7.15
AKGRT
6.05
ANHYT
2.96
ANSGR
19.1
AVIVA
4.18
GUSGR
4.54
RAYSG
11.1
YKSGR
Mcap
(YTL)
2188
1059
592
477.5
314
182
888
P/BV
1.2
3.3
1.2
11.3
1.9
11.4
4.4
P*/Premiums
Earned
2.1
3.1
0.5
3.4
1.0
1.2
2.0
P/Earnings
29.5
41.9
23.5
35.5
123.7
-11.4
45.6
P* per 1%
Market Share
79
50
28
208
38
55
101
P*: Adjusted price for participation portfolio
Summary of Recent Insurance Deal Multiples
Stake Value of Market
Value of 1%
Implied
Company
Buyer
Seller
sold
Stake
Share m.share (mn YTL) P/BV
Genel Sigorta
Mapfre
Cukurova
80.0% €285mn 3.34%
n.a.*
1.4
Ray Sigorta
TBIH
Dogan
58.2% $81.5mn 3.28%
60
12.2
Garanti Sigorta
Eureko BV GarantiBank 80.0% €365mn 4.54%
186
10.3
Garanti Emeklilik Eureko BV GarantiBank 15.0% €100mn 6.07%
203
25.3
* n.a due to insufficient information on subsidiaries of Genel Sigorta
Part of these discounts can be attributed to the fact that Anadolu Sigorta is not an immediate acquisition target as the main shareholder of the Company, Is Bank, is not inclined to
sell its insurance business at the moment. However, we would strongly argue that this does
not justify the full extent of the discount applied to the Company. We have to underline that
the companies with deal expectations are only trading at higher multiples because the deals
are expected to take place at high valuations, and that strategic buyers are only willing to
offer such high valuations because of the strong growth potential in the sector. Anadolu Sigorta, the leading player in the Turkish insurance market with its 13.2% market share and
massive distribution network of 1,304 agencies and 866 Isbank branches, is one of the best
positioned Companies to benefit from the expected growth in the sector. Note that the total
non-life premiums to GNP ratio of Turkey stands at 1.4%, still denoting an underpenetrated
nature when compared to the 2.4% ratio in Eastern Europe.
We believe that the ongoing M&A deals will result in a re-rating of the Turkish insurance
market, similar to what has been seen in the banking sector. Anadolu Sigorta will be affected very positively from such a re-rating.
2
ANADOLU SIGORTA (ANSGR.IS)
VALUATION
We value Anadolu Sigorta’s insurance business at 1x Adj. P/Earned Premium multiple (or
0.6x Adj.P/Premium multiple), which suggests YTL683mn for the core business of the Company. Adding total participation value of YTL226mn after discounting the total value of listed
participation portfolio by 20%, we reach a net asset value of YTL909mn for the Company.
We set our target price at YTL4.5 vs. the current price of YTL2.96, which indicates 53% upside potential.
Anadolu Sigorta NAV
Mcap (mnYTL) or
Valuation Method Valuation Multiple (x)
Anadolu Current NAV % of Total
Sig. Stake
(mnYTL)
NAV
Listed Participations
Is REIT
TSKB
Is Inv. Trust
Is Leasing
TSKB Inv. Trust
Is Risk Venture
Anadolu Life and Pension Co.
Is Bank
Current Mcap
Current Mcap
Current Mcap
Current Mcap
Current Mcap
Current Mcap
Current Mcap
Current Mcap
1,043
912
124
320
13
90
1,059
19,296
50
8
0
0
0
6
212
0
5%
1%
0%
0%
0%
1%
23%
0%
276
20%
221
30%
0%
24%
5
1%
5
1%
226
25%
683
75%
Total NAV
Current Mcap of Anadolu Sigorta
909
592
100%
Target Mcap
Upside/Downside to Current Mcap
909
53%
100%
Total Listed Participations
Holding discount on total listed participations
Total Listed Participations (with discount)
4.77%
0.89%
0.01%
0.06%
1.73%
6.67%
20.00%
0.00%
Unlisted Participations
Various small participations
Total Book Value
5
Total Unlisted Participations
Total Participations (Listed with discount+Unlisted)
Core Insurance Business
Adj.P /E.Premium
1.0
Note: All current market caps as of 18 April 2007.
3
ANADOLU SIGORTA (ANSGR.IS)
We believe that we are fairly conservative in our valuation as we have used the current
market values of Anadolu Sigorta’s participations in our net asset value calculation, rather
than their target values. Being mostly active in non-bank financial sectors, these participations are also likely to gain value on the back of economic growth and re-ratings in their respective industries.
Most notably, Anadolu Life and Private Pension Company, which accounts for 77% of
Anadolu Sigorta’s listed participation portfolio, is also likely to be re-rated in the near future
in terms of its market share, as M&A deals continue to set benchmarks for this infant industry. Please recall that GarantiBank agreed to sell a 15% stake in the Garanti Life and Private Pension company to Eureka on 21 March for €100mn. The deal values the whole company at €667mn (YTL1,233mn). As of FY06, Garanti Life and Private Pension had a market
share of 6.07% in the life insurance market. Thus, the deal values each 1% of market share
of the company at YTL203mn. A similar pricing method implies a valuation of YTL4,263mn
for Anadolu Hayat Sigorta thanks to its 20.98% market share in the life branch, while the
current mcap we have used in our NAV calculation for Anadolu Sigorta is just YTL1,059mn.
The stake at Anadolu Hayat Sigorta, the leader Company in life branch, should be considered as a hidden asset for Anadolu Sigorta.
The Implication of Garanti Life and Private Pension Deal
Implied value for ANHYT (Anadolu Life and Pension Co.)
Implied value for ANSGR's 20% stake at ANHYT
Additional value to ANSGR's NAV
ANSGR's implied NAV
Upside to current Mcap
4263
853
513
1421
140%
In addition, Anadolu Sigorta is currently buttressed by a net cash position of YTL114mn in
the widest sense of the net cash definition. Leaving aside the theoretical yet-to-beconcluded discourse on the inclusion of net cash/debt of an insurance Company in its net
asset value calculation, we have left this amount out of the calculation for the time being, in
the interests of adopting a conservative approach. However, its strong cash surplus should
also be considered as a plus in terms of the valuation of the Company.
4
ANADOLU SIGORTA (ANSGR.IS)
THE COMPANY
Anadolu Sigorta has been the leading player in the non-life segment of the Turkish insurance market since 2002, in terms of premium production. Anadolu Sigorta’s market share
reached 13.2% in 2006 in the non-life segment, where there are currently 24 active companies.
Market Shares of Non-life Insurance Companies (2006)
(%)
14.00
12.00
10.00
8.00
6.00
4.00
TOPRAK (*)
HUR
GENERALI
ISIK
BIRLIK
HDI
TEB
AIG
SEKER
AVIVA
ANKARA (*)
GUVEN
FINANS
RAY
T.GENEL
GARANTİ (*)
BASAK
GUNES
ERGO ISVICRE
YAPI KREDI
AK SIGORTA
KOC ALLIANZ
AXA OYAK
0.00
ANADOLU
2.00
Source: Insurance association (*) Estimated by Insurance association
In 2006, Anadolu Sigorta set a new milestone to become the the first Company in the sector
to pass the YTL1bn mark in premium production. Anadolu Sigorta’s total premium production reached YTL1,060mn, with a 28.4% YoY increase, while the total premium production
in the sector increased by 26.2% YoY to YTL8,007mn.
The Company generated 86% of its total premiums from the accident, fire, and health
branches in 2006, in line with the general sectoral dynamics.
Premiums by Branches (2006)
ANADOLU SIGORTA
Product
Accident
Fire
Health
Marine
Engineering
Personal Accident
Legal Protection
Credit
Agriculture
Total
Premiums Share in
Total
(mn YTL)
568
53.6%
227
21.4%
120
11.3%
53
5.0%
52
4.9%
36
3.4%
4
0.4%
1
0.1%
0
0.0%
1,060 100.0%
YoY
Change
29.7%
34.8%
9.3%
23.1%
50.2%
25.1%
11.2%
110.6%
110.2%
28.4%
NON-LIFE INSURANCE MARKET
Premiums Share
YoY
(mn YTL) in Total Change
4,541
56.7%
22.2%
1,585
19.8%
39.6%
740
9.2%
24.5%
346
4.3%
19.3%
431
5.4%
34.4%
276
3.4%
28.0%
26
0.3%
22.0%
8
0.1%
85.4%
54
0.7%
11.9%
8,007 100.0%
26.2%
Source: Anadolu Sigorta annual report. Accident branch includes Motor Third Party Liability branch figures.
5
ANADOLU SIGORTA (ANSGR.IS)
The accident branch remained a loss making branch for Anadolu Sigorta and the sector as
a whole, particularly due to car insurance and the motor third party liability branch. The market is striving to alleviate the problem by both rationalizing pricing and improve its claims
management. However, the fierce competitive environment may hinder any immediate progress towards better pricing schemes, while claims management is more promising in terms
of beneficial results.
In addition to the deterioration of technical profitability in accident branches, Anadolu Sigorta’s 2006 technical profit was also hit by the large fire at Trakya Cam. Nevertheless, the
fire branch is generally a profitable branch with a low claims ratio, where Anadolu Sigorta
enjoys a leading position with its 14.3% market share. In 2007, the fire branch is likely to
contribute more strongly to Anadolu Sigorta’s technical profitability.
Note too that the fall in technical profit from the fire branch was partly compensated by a
reversal of loss from the health branch to a “healthy” profit in 2006. With its successful
claims management, Anadolu Sigorta is also determined to remain profitable in the health
branch.
Other branches with better technical profitability prospects are the marine, agriculture, legal
protection, personal accident and credit branches, yet the premium generation from these
branches remains quite limited. As legal infrastructure develops and economic growth continues in parallel with EU convergence, premium generation from these branches is likely to
increase.
Gross Technical Profits by Branches
(mn YTL)
2005
Fire
30.5
Personal Accident
14.9
Marine
15.5
Health
-9.1
Engineering
3.5
Legal Protection
2.7
Agriculture
0.0
Credit
0.0
Motor Third Party Liability 14.6
Accident
-14.6
Total
58.0
2006
20.5
15.8
15.8
8.5
4.8
3.1
0.0
0.0
-8.7
-33.8
26.0
YoY
Change
-33%
6%
2%
n.m
37%
17%
-19%
-28%
n.m
n.m
-55%
An analysis of the breakdown of the costs on the technical side reveals that net commissions to agencies, totalling YTL97.3mn in 2006, is Anadolu Sigorta’s single largest operating expense item, and is accounted for at the gross technical profit level. It is followed by
the YTL68.8mn in general expenses. Personnel expenses account for YTL32.5mn of this
amount, followed by YTL 24.3mn for general administrative expenses and YTL11.9mn for
marketing expenses.
With the amendment to accounting policies, insurance companies can now book part of
their investment income under technical income (YTL27.6mn in 2006).
Anadolu Sigorta realized a net technical loss of YTL15.5mn in 2006.
6
ANADOLU SIGORTA (ANSGR.IS)
Net Technical Profit by Branch
(mn YTL)
Personal Accidnt
Marine
Fire
Legal Protection
Engineering
Health
Agriculture
Credit
Motor Third Party Liability
Accident
Total
2005
13.6
10.2
22.2
2.3
0.7
-14.7
0.0
0.0
11.5
-24.4
21.41
2006 YoY Change
15.0
10%
11.5
13%
10.5
-53%
2.9
24%
213%
0.5
n.m
0.0
-44%
0.0
-89%
-11.9
n.m.
-45.9
n.m.
-15.2
n.m
2007-2008 OUTLOOK
We expect Anadolu Sigorta to raise its premiums by 20% in 2007 to YTL1,279mn. We factor in a conservative growth rate as we expect the ongoing M&A frenzy in the market to motivate smaller players to grab market share to reach better valuations on deals.
Nevertheless, a substantial upside challenge remains on our premiums growth assumption.
We believe that better utilization of Is Bank’s branch network would enable Anadolu Sigorta
to tackle increased competition in the insurance market following new foreign entries in
2006 and 2007. We expect Anadolu Sigorta’s premiums to grow by 25% in 2008 and pass
the YTL1.5bn threshold.
In terms of profitability, we exINCOME STATEMENT
2005
2006 2007E 2008E pect Anadolu Sigorta to inI-TECHNICAL PART
crease its profitability in the fire,
A-Non-Life Technical Income
593
724
876 1,095 health, engineering and marine
Total Premiums
826
1,060
1,272 1,590 branches. In 2007, we forecast
1-E. Premiums (Net of Reinsurer)
543
683
827 1,034 the company to reach a techni2- Investment Income
23
28
33
42 cal profit of YTL21mn, similar to
3- Other Technical Income (Net)
27
13
16
20 the level in 2005. Note that the
B-Non-Life Technical Expense (-)
-572
-739
-855 -1,063 large
fire at Trakya Cam
1-Total Claims (Net of Reinsurer)
-422
-551
-634
-787 squeezed profitability in 2006.
2- Ch. in Bonus and Dis.Provisions (Net)
0
0
0
0
3- Ch. in Other Technical Reserves (Net)
-5
-6
-7
-8
-145
-182
-215
-268
21
-15
21
32
4-Operating Expenses (-)
C-Non Life Technical Profit (A-B)
II-NON TECHNICAL PART
D-Investment Income
87
103
124
155
E-Investment Expenses (-)
-35
-44
-58
-72
F-Other Income and Expenses (+/-)
-17
-12
-33
-41
40
25
54
73
Net Profit (Loss)
A)Conservation Ratio
70%
73%
70%
70%
B)Loss-Premium Ratio
-78%
-81%
-77%
-76%
C)Cost Ratio
-18%
-17%
-17%
-17%
D)Combined Ratio
-95%
-98%
-94%
-93%
With this improvement, we expect a fall in the combined ratio
of the Company from 98% in
2006 to 94% in 2007. We expect profitability to improve further in 2008 on the back of the
increase in the share of premiums generated out of the bank
branches. Bank clients have
better risk profiles, due to intensive data keeping and banks’
credit scoring systems. We expect profitability to improve by a
further 1 p.p. in 2008, with
Anadolu Sigorta reaching a
technical profit of YTL32mn.
7
ANADOLU SIGORTA (ANSGR.IS)
ANADOLU SIGORTA - SUMMARY FINANCIAL TABLES
Balance Sheet
4Q05
1Q06
2Q06
3Q06
4Q06
Change
QoQ (%)
Change
YoY (%)
2005
2006
Change
YoY (%)
I-CURRENT ASSETS
Cash and Equivalents
Financial Investments
168
185
237
293
260
-11%
54%
168
260
54%
273
278
234
228
282
24%
3%
273
282
3%
Short Term Receivables
347
343
366
352
425
21%
22%
347
425
22%
I- Total Current Assets
791
818
846
879
969
10%
23%
791
969
23%
208
232
181
217
233
7%
12%
208
233
12%
60
68
50
56
58
5%
-3%
60
58
-3%
153
170
137
167
181
8%
18%
153
181
18%
II-LONG TERM ASSETS
Long Term Financial Assets
Marketable Securities
Participations
II- Total Long-Term Assets
TOTAL ASSETS
237
260
208
243
260
7%
10%
237
260
10%
1,028
1,078
1,054
1,122
1,229
10%
20%
1,028
1,229
20%
III- SHORT TERM LIABILITIES
Short Term Payables
80
82
76
70
96
38%
20%
80
96
20%
Technical Reserves
363
384
428
457
498
9%
37%
363
498
37%
Reserves for Unearned Pr.-net
248
259
292
304
337
11%
36%
248
337
36%
Reserves for Outst. Cl.-net
115
125
137
152
161
5%
40%
115
161
40%
464
499
509
532
609
14%
31%
464
609
31%
98
101
105
108
114
5%
17%
98
114
17%
Paid in Capital
155
155
200
200
200
0%
29%
155
200
29%
Total Equity
466
478
440
482
506
5%
9%
466
506
9%
TOTAL LIABILITIES
1,028
1,078
1,054
1,122
1,229
10%
20%
1,028
1,229
20%
INCOME STATEMENT
4Q05
1Q06
2Q06
3Q06
4Q06
Change
QoQ (%)
Change
YoY (%)
2005
2006
Change
YoY (%)
A-Non-Life Technical Income
190
153
168
187
216
16%
14%
593
724
22%
Total Premiums
265
218
267
244
331
35%
25%
826
1,060
28%
1-E. Premiums (Net of Reinsurer)
158
144
160
176
204
16%
29%
543
683
26%
1.1- Premiums (Net of Reinsurer)
185
155
192
188
237
26%
28%
582
773
33%
1.2- Change in Unearned Premium Pr
-28
-11
-33
-12
-33
n.m.
n.m.
-39
-90
n.m.
1.3- Changes in Current Risk Provison
0
0
0
0
0
n.m.
n.m.
0
0
n.m.
2- Investment Income Transfers from
6
6
6
7
9
20%
58%
23
28
18%
III- Total Short Term Liabilities
IV- LONG TERM LIABILITIES
Total Long-Term Liabilities
V- SHAREHOLDERS EQUITY
I-TECHNICAL PART
3- Other Technical Income (Net of Tra
27
3
3
4
4
0%
-86%
27
13
-52%
B-Non-Life Technical Expense (-)
-168
-155
-175
-192
-217
n.m.
n.m.
-572
-739
n.m.
1-Total Claims (Net of Reinsurer)
-119
-121
-128
-142
-160
n.m.
n.m.
-422
-551
n.m.
1.1- Claims Paid (Net of Reinsurer)
-118
-111
-116
-127
-152
n.m.
n.m.
-400
-506
n.m.
n.m.
1.2- Changes in Outstanding Claims P
-1
-10
-12
-16
-8
n.m.
n.m.
-21
-46
2- Changes in Bonus and Discount Pr
0
0
0
0
0
n.m.
n.m.
0
0
n.m.
3- Changes in Other Technical Reserv
1
-1
-1
-1
-2
n.m.
n.m.
-5
-6
n.m.
4-Operating Expenses (-)
-50
-32
-47
-48
-55
n.m.
n.m.
-145
-182
n.m.
C-Non Life Technical Profit (A-B)
22
-2
-8
-5
-1
n.m.
n.m.
21
-15
n.m.
21
26
29
23
25
9%
19%
87
103
18%
n.m.
II-NON TECHNICAL PART
D-Investment Income
E-Investment Expenses (-)
-8
-8
-16
-7
-13
n.m.
n.m.
-35
-44
F-Other Income and Expenses (+/-)
-14
-7
-2
-3
-1
n.m.
n.m.
-17
-12
n.m.
G-Net Profit (Loss)
18
4
8
6
9
50%
-53%
40
25
-37%
8
Garanti Securities
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No.2/8 34340 Levent Istanbul Turkey
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Alev Bosut:
Omer Tanacan:
Facsimile:
E-mail:
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+90 212 217 84 70
[email protected]
The information in this report has been obtained by Garanti Securities Research Department from sources believed to be reliable. However, Garanti Securities cannot guarantee the accuracy, adequacy,
or completeness of such information, and cannot be responsible for
the results of investment decisions made on account of this report.
This document is not a solicitation to buy or sell any of the securities
mentioned. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change
9 without
notice. This report is to be distributed to professional emerging markets investors only.