European Insurers Cheap Versus Banks Amid Debt Crisis
European insurers dropped to the cheapest valuations versus banks since at least 2002, even as they may have less to lose amid the sovereign-debt crisis.
The Stoxx Europe 600 Insurance Index is priced at 10.7 times its companies’ reported earnings, 35 percent below the ratio for banks, weekly data compiled by Bloomberg show. The insurance gauge’s five biggest firms by market value hold about 21 billion euros ($26 billion) in government bonds from Greece, Spain and Portugal, compared with 34 billion euros for the five largest banks, according to separate data.
Bank of America Corp. and Morgan Stanley strategists are telling clients insurers are too cheap to pass up after dropping on concern widening budget deficits may trigger debt defaults and hurt the economic recovery, and ahead of new regulation that will probably force financial firms to hold more capital.
“There are more opportunities today in terms of valuations to buy insurers,” said Sofia Nevrokoplis, senior fund manager at BNP Paribas Asset Management in Paris, which had 542 billion euros as of March 31. “Overall, we are overweight on insurers with a preference for non-life and reinsurance stocks. The sovereign crisis has changed the way I look at some banks, but hasn’t changed the big picture on the insurance sector.”
Allianz SE (ALV) and Axa SA (CS), Europe’s largest insurers, are trading at 6.5 and 9.2 times their respective profits. Munich Re, the world’s biggest reinsurance company, has a ratio of 7.8, near the lowest since 2008. That compares with 28.1 for London-based HSBC Holdings Plc (HSBA), Europe’s largest bank by market value.
“The bark from sovereign debt weakness is worse than its bite, in our view,” Bank of America Merrill Lynch analysts, including Blair Stewart and Brian Shea, wrote in a note on insurers this month. “Direct exposure to the most worrisome countries is extremely small.”
They said valuations offer an “attractive entry point” and that “the regulatory threat for insurers seems far lower than for the banking sector.” Morgan Stanley lifted its stance on the group to “overweight” from “neutral” in a May 24 European strategy report, also citing “attractive” price-to-earnings ratios.
The Stoxx 600 Insurance declined 1.4 percent, while the banks index retreated 1 percent today.
Concern the debt crisis may worsen wiped more than $4 trillion from the value of global equities in May. The VStoxx Index, which measures the cost of using options against declines in the Euro Stoxx 50 Index, a benchmark measure for the euro region, has climbed 19 percent in 2010, after surging to its highest level in 15 months on May 20. The Euro Stoxx 50 has declined 8.7 percent this year.
“With capital market volatility remaining at a high level, people are only focusing on insurers’ investments to make sure they don’t miss the next bomb that might explode,” said Moritz Rehmann, who helps manage the equivalent of about 10 billion euros at DJE Kapital AG in Munich.
Regulators are seeking to restore stability to the financial system after the industry’s worst crisis since the Great Depression, triggered by the bursting of the U.S. housing bubble and exacerbated by the collapse of Lehman Brothers Holdings Inc. Writedowns and losses at financial firms worldwide amounted to more than $1.4 trillion.
The European Commission is developing a framework of rules in the 27-member bloc -- dubbed Solvency II -- that’s designed to align insurers’ risks with the capital they hold to protect policyholders. Banks will also be required to hold more and better capital and liquidity reserves under planned rules.
The U.K. government yesterday announced a bank levy as part of that country’s biggest peacetime deficit reduction. France and Germany are also finalizing details of their own bank taxes, according to a joint statement issued by the German government.
“We expect the regulatory impact to be milder on insurers than on banks,” said BNP’s Nevrokoplis. “European governments have no interest in putting insurers in a position where they have to raise more capital.”
Carlos Montalvo, secretary general of the Committee of European Insurance and Occupational Pension Supervisors, which is advising the EU Commission on the new rules, said in April that insurers may not need to raise capital as a result of the new regime.
Insurance companies are also trying to lure investors by increasing their dividend payouts. Allianz, Germany’s biggest insurer, raised its dividend for 2009 by 17 percent. Assicurazioni Generali SpA (G), Italy’s largest, more than doubled its cash payout, while Switzerland’s Zurich Financial Services AG announced the biggest dividend in 10 years. The Stoxx 600 insurance gauge’s dividend yield of 3.9 percent compares with 2.7 percent for banks.
“A company raising its dividend is a sign of huge confidence,” said Paul Vrouwes, who helps oversee about 362 billion euros of assets at ING Investment Management in The Hague, Netherlands. “I expect this element to play an important role in stock picking in the near future. At the moment I have a neutral stance on insurers, but I will likely shift my portfolio towards insurance companies and particularly non-life insurers in the longer term.”
Life insurers have been hurt by low interest rates, which weigh on returns they can offer clients for retirement products. In contrast, prices in some of the biggest property and casualty insurance segments, including motor insurance, are expected to rise in European countries such as Germany following a year-long price war and higher claims seen in the first quarter.