Turkish Non-Life Insurance Sector

Transcription

Turkish Non-Life Insurance Sector - Waiting for the dust to settle
We are initiating coverage for the Turkish non-life insurance
sector with an “Outperform” recommendation for Aksigorta
with a 12-month target share price of TL2.40 (27% upside
potential) and “Market Perform” recommendation for Anadolu
Sigorta with a 12-month target share price of TL2.00 (16%
upside potential).

The current valuation levels for both companies are not
demanding. We prefer Aksigorta over Anadolu Sigorta
considering i) Aksigorta’s limited exposure to the Motor Third
Party Liability (MTPL) segment, ii) its remaining negligible
incurred but not reported (IBNR) burden and iii) its improved
profitability.

Penetration levels remain low in the sector; however, we are
adopting a cautious stance on the sector as bottom lines are
likely to remain under pressure due to ongoing problems in the
MTPL segment and the remaining IBNR burden.
Regulatory uncertainties in the MTPL segment pose a risk.
Companies’ mounting losses and customer dissatisfaction due to
high premiums have prompted the government to find a solution to
the MTPL segment. Several proposals are on the table, such as
clarifications in faulty driver cases, standardization of compensation
calculations in bodily injury cases, intervention in the prices and
making it mandatory for companies to sell MTPL policies. The first
two would be positive for companies, whereas the last two would be
negative. Regulatory risks would continue to be a discount factor for
the sector as the uncertainty prevails. In contrast to the MTPL, other
segments, such as MOD, health, fire and natural disasters deliver
technical profits. Aksigorta stands out with its 6% exposure to the
MTPL segment unlike Anadolu Sigorta which has a 23% exposure.
Remaining IBNR burden to pressure the bottom lines. The
regulation change regarding the IBNR calculation and minimum
wage increase put a c.TL4-5bn provisioning burden on the sector.
Most companies chose to reflect the burden gradually until 2019. In
contrast to its peers, Aksigorta preferred to book most of the IBNR
burden in 2015. Thus, we expect the Company to become more
profitable in the coming period.
Aksigorta: Aksigorta is a candidate for a re-rating story with its focus
on the profitable non-MTPL segments, negligible remaining IBNR
burden and better profitability prospects. We expect the Company to
achieve a 22% sustainable RoE in the long run, implying that the
current 2016E P/BV multiple of 1.38x is attractive. However, a
regulation that could force companies to sell more policies in MTPL
segment would negatively impact the operations.
Anadolu Sigorta: Anadolu Sigorta has a strong presence in the
sector. It ranks number two in the non-life insurance sector with a
13.7% market share. Its shares have outperformed the BIST-100
index by 30% YoY, thanks to its 20% stake in Anadolu Hayat
(ANHYT, OP), which benefited from the positive momentum in the
private pension sector. However, its high exposure to the MTPL
segment, the remaining IBNR burden and its low profitability with a
9% sustainable RoE prompt us to be cautious at this stage.

Aksigorta (AKGRT.TI / AKGRT.IS)
Current Price (TL)
1.89
Target Price TL (12 Month)
2.40
Potential Return
27%
Current Mcap (TLmn)
578
Outperform
Recommendation
Stock Market Data
AKGRT.IS / AKGRT.TI
Relative Performance:
1 mth
3 mth
12mth
6%
1%
-13%
Average Daily Vol (US$mn) 3 mth:
0.2
Beta (historical, w eekly)
Financials and Ratios
0.80
2014
2015
2016E
31
-135
72
97
Growth (%)
-80%
n.m.
n.m.
35%
GWP (TL mn)
1,714
1,622
1,817
2,109
Growth (%)
12%
-5%
12%
16%
-31
-249
-6
27
n.m.
-699%
98%
n.m.
Net Income (TL mn)
Total Technical Profit
Growth (%)
Technical Margin
Combined Ratio
P/E (x)
2017E
-2%
-15%
0%
1%
103%
122%
101%
98%
6.0
18.6
n.m.
8.0
P/BV (x)
1.1
1.6
1.3
1.2
ROAE
6%
-31%
19%
22%
0.10
-0.44
0.23
0.32
EPS (TL)
Anadolu Sigorta (ANSGR.TI / ANSGR.IS)
Current Price (TL)
1.72
2.00
Potential Return
16%
Current Mcap (TLmn)
860
Recommendation
Market Perform
Stock Market Data
ANSGR.IS / ANSGR.TI
1 mth
3 mth
12mth
-2%
-2%
30%
0.1
Net Income (TL mn)
Growth (%)
GWP (TL mn)
0.80
2014
2015
2016E
72
64
77
2017E
96
6%
-11%
21%
24%
3,005
3,611
4,140
4,770
Growth (%)
9%
20%
15%
15%
-69
-173
-156
-133
68%
-150%
10%
15%
Growth (%)
Technical Margin
Combined Ratio
P/E (x)
-2%
-5%
-4%
-3%
103%
108%
107%
105%
9.0
12.0
13.5
11.1
P/BV (x)
0.8
0.7
0.7
0.6
ROAE
7%
6%
6%
7%
0.14
0.13
0.15
0.19
EPS (TL)
Analyst: Cem Emre Bilgin
+90 (212) 384 1139
cbilgin@garanti.com.tr
Sales Contact:
+90 (212) 384 1155
icm@garanti.com.tr
Please see the last page of this report for important disclosures.
March 29, 2016
Non-Life Insurance Sector
RESEARCH
Table of Contents
Investment Case
4
Turkish Non Life Insurance Sector
9
Companies
22
Aksigorta
23
Anadolu Sigorta
33
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RESEARCH
Glossary
Combined Ratio
Loss Ratio
Expense Ratio
Technical Margin
Loss Ratio + Expense Ratio
Claims / Earned Premiums
(Operating Expenses + Other Expenses) / Earned Premiums
Technical Profit / Gross Written Premiums
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RESEARCH
Investment Case
We are initiating our coverage for the non-life insurance sector with an
“Outperform” recommendation for Aksigorta with a 12-month target price
of TL2.40 (27% upside potential) and a “Market Perform”
recommendation for Anadolu Sigorta with a 12-month target price of
TL2.00 (16% upside potential). We are adopting a cautious stance on
the sector and suggest a selective approach between Aksigorta and
Anadolu Sigorta in terms of operational outlook and upside.
A disappointing performance in the recent period
The Turkish non-life insurance sector’s profitability has been volatile
since 2010. The sector has not been able to achieve sustainable
profitability from its core insurance activities. While the sector’s average
technical profit margin has averaged 1% in the respective period, this
includes transferred investment income to the technical side.
The main reasons behind the lackluster performance are:

High exposure to the motor segments.

Intense competition pressurizing premium prices until 2015.

High claims frequency.

Regulation changes and continuing uncertainties in the Motor
Third Party Liability (MTPL) segment.
In fact, the MTPL segment has weighed heavily on the sector’s bottom
line resulting in a c.TL5bn technical loss during the last five years. The
major factors behind this technical loss are as follows:

10% of the premiums collected in the MTPL segment started to be
transferred to the Social Security Institution back in 2013.

Although by definition the MTPL product includes making
compensation payments to third parties, the Turkish Supreme
Court ruled in 2014 that non-life insurance companies are required
to pay compensation to the relatives of faulty drivers.

The introduction of the new Incurred But Not Reported (IBNR)
calculation method at the end of 2014 dramatically increased the
IBNR provisioning burden of companies.

The government put a price cap on MTPL premium prices for
commercial vehicles before the general elections on November 1,
2015.

The 30% increase in the minimum wage, effective as of January
2016 put an extra burden on the provisions. Note that if the injured
party’s income level is not specified properly, the expected future
income level that is used in calculation of the compensation
amount is calculated based on the minimum wage.
Although there have been significant increases in MTPL prices in 2015,
non-life insurers have not been able to achieve a sustainable technical
profit in the segment. At the same time, the price increase has resulted
in a backlash from consumers. Due to the popularity of the product, the
government plans to intervene to find common ground to solve the
problem. Several proposals were made, such as the unification of MOD
and MTPL products and a clarification of regulations, especially for
cases involving faulty drivers.
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RESEARCH
The government is on the brink of making a regulation change, but
the path is not yet clear
We expect that the Treasury will make changes to the MTPL system.
However, the content of these changes is not crystal clear. Due to the
varying proposals, the ongoing uncertainty regarding the nature of the
regulatory changes and conflicts of interest between companies and
clients, we did not include such scenarios in our valuation. Regulatory
risks are still a discount factor for the sector, which include both upside
and downside risks. We believe that a solution which would decrease
the provisioning requirements of non-life insurers would be a strong
catalyst for the companies. However, a populist approach to the problem
could worsen the situation.
Several government officials have expressed that the government is
trying to find a solution to the problems in the MTPL segment. Minister of
Transportation Binali Yildirim said that the government is dedicated to
making regulatory changes in the MTPL segment and the unification of
the MTPL and MOD segments is one of those options. On the other
hand, the regulator aims to make changes and is considering several
options, which have both positive and negative ramifications for
insurance companies. A legislation package has been sent
to parliament which includes a draft that prevents payments to faulty
drivers and standardizes compensation calculations in bodily injury
cases. These changes would be positive for the sector, but the new draft
does not preclude claims payments related to cases dating back more
than ten years. Note that retroactive claims payments are one of the
main reasons behind the pressure on the sector’s profitability. Hence,
such a solution would not entirely alleviate the problem arising from the
MTPL segment. Separately, the Turkish Treasury has been working on
some changes aimed at reducing premium prices. The regulator is said
to be shifting to a system under which premium prices would be
determined by a tariff. Moreover, the Treasury targets to force
companies to sell MTPL policies under a market share parity adjustment.
According to the adjustment, the market shares of insurance companies
in the MTPL segment would be consistent with their total market shares.
Companies with a limited exposure to the MTPL segment, like Aksigorta,
would be negatively affected by such a regulation.
IBNR provisions will continue to squeeze the bottom lines
The regulation change in the IBNR calculation method has imposed a
significant burden on non-life insurers’ bottom lines. According to our
estimates, the sector’s total IBNR burden increased by TL4-5bn on the
back of the regulation change in December 2014. In order to relieve
insurance companies, the Treasury extended the deadline for
companies to book IBNR provisions to five years in February 2016. Most
non-life insurance companies chose to take advantage of the deadline
extension. Hence, the increased burden on companies will squeeze their
profitability until 2019. Aksigorta reflected most of the IBNR provisions in
2015. Thus, we expect it to be more profitable than its peers which
chose to reflect this burden over an extended period of time.
Companies focusing on the non-MTPL segments have come to the
forefront
Although the MTPL segment weighs significantly on the sector’s
profitability, other non-life insurance segments, such as MOD, health,
general losses and fire & natural disasters remain profitable as the
aforementioned segments deliver technical profits. Note that the sector’s
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March 29, 2016
RESEARCH
exposure to the MTPL segment increased by 6pp to 27% between 2010
and 2015. We believe that non-life insurers which shifted their focus from
the MTPL to non-MTPL segments will outperform their peers in terms of
operational outlook. Particularly, we welcome Aksigorta’s strategy to
reduce its exposure to the MTPL segment. Note that Aksigorta’s
exposure to the MTPL segment declined by 12pp between 2011-2015
and the Company aims to further decrease its exposure. On the other
hand, Anadolu Sigorta began to withdraw from irrational competition in
the MTPL segment, choosing not to sell MTPL policies that are not
profitable.
Losses raise concerns over capital adequacy
Due to the sector’s low technical profitability and remaining provisioning
deficit most companies recorded negative bottom lines. Mounting losses
reduced the book values of companies. Therefore, concerns over capital
adequacy have increased. We believe that non-life insurance companies
that do not have significant capital adequacy concerns will come to the
forefront in the sector. The solvency positions of non-life insurance
companies under our coverage, Aksigorta and Anadolu Sigorta, are at
safe levels. Aksigorta’s minimum equity is at 119% of the required
equity, while that of Anadolu Sigorta is 130%.
Current valuation levels are not demanding
Due to the sector’s limited profitability and its chronic problems, shares
of non-life insurance companies listed on the BIST have underperformed
both the BIST-100 index and their global peers. We composed a non-life
insurance sector index to observe the sector’s price movements in the
last five years and are labeling it the “Non-Life Insurance Index.” Our
index is based on the free float market capitalizations of three non-life
insurers (Aksigorta, Anadolu Sigorta and Gunes Sigorta) that are listed
on the BIST. We included Anadolu Sigorta in our index solely based on
its core non-life insurance operations; excluding the contribution of its
participations (20% stake in Anadolu Hayat and 4.8% stake in Is REIC).
The Non-Life Insurance Index has underperformed the BIST-100 by 31%
during the last five years with its unstable operational performance. On a
P/BV basis, this index trades at a c.4% discount to its five-year historical
average, being above the -1 standard deviation level. We therefore
conclude that the sector’s current valuation levels are not demanding.
However, we opt to remain selective for non-life insurance sector stocks,
focusing on companies that have a better operational outlook and
profitability, while offering attractive upsides.
Non Life Insurance Index P/BV
Non Life Insurance Index / BIST - 100
1.20
110
1.08
100
0.96
90
80
0.84
70
0.72
60
03.16
11.15
07.15
03.15
11.14
07.14
03.14
11.13
07.13
03.13
11.12
07.12
03.12
11.11
07.11
+1 std
-2 std
03.16
11.15
07.15
03.15
11.14
07.14
03.14
11.13
03.13
11.12
07.13
Average
+2 std
50
03.11
P/BV
-1 std
07.12
03.12
11.11
07.11
03.11
0.60
Non-Life Insurance Index / BIST-100
Source: Rasyonet, Garanti Securities Estimates
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March 29, 2016
RESEARCH
The Turkish Non-Life Insurance Index has underperformed the Euro
Stoxx Non-Life Insurance Index, which is composed of European non-life
insurers, by 70% in USD terms during the last five years. The main
reasons behind the underperformance of the Turkish non-life insurance
sector are: i) country-specific risks mainly due to the multiple elections,
ii) the sharp depreciation in the TL, iii) non-life insurance sector specific
risks namely in the MTPL segment and iv) European non-life insurance
companies’ better operational outlooks due to the lower loss ratios and
their significant investment portfolios, which have increased in value on
the back of easing monetary policies.
Non Life Insurance Indices: Turkey vs Euro Stoxx (in USD terms)
180
160
140
120
100
80
60
40
Euro Stoxx Non Life Insurance Index
12.15
09.15
06.15
03.15
12.14
09.14
06.14
03.14
12.13
09.13
06.13
03.13
12.12
09.12
06.12
03.12
12.11
09.11
06.11
03.11
20
Turkish Non Life Insurance Index
Source: Bloomberg, Garanti Securities Estimates
Underpenetration levels offer growth potential
Turkish non-life insurance sector is underpenetrated compared to its
peers. Share of non-life gross written premiums (GWP) to GDP stands at
1.3% as of 2014 end; while the world average stands at 2.7%. We
expect GWP/GDP ratio to increase to 2% levels by the end of 2024. We
project a 15% CAGR for the sector in the same period.
In terms of density parameters, non-life insurance premium per capita of
Turkey stands at USD 133, while world average is USD 294. We believe
that current underpenetration levels offer growth potential for Turkish
non-life insurance sector in the upcoming periods.
Aksigorta (AKGRT, OP): We are initiating coverage of Aksigorta
(AKGRT.IS) with an “Outperform” recommendation and a 12-month
forward target price of TL2.40, indicating a 27% upside. Despite our
cautious stance on the sector, we believe that Aksigorta has
differentiating factors to justify our recommendation:

The Company reduced its exposure to the loss-making MTPL
segment. While the MTPL segment constituted 18% of the
Company’s total GWPs in 2012, Aksigorta began a gradual
withdrawal from the MTPL segment and its exposure declined to
14% in 2014 and 6% in 2015.

The Company booked most of its IBNR burden in 2015 in contrast
to other companies. Hence, the Company will be in a better
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March 29, 2016
RESEARCH
position to achieve profitability as the negative impact on its P&L
resulting from the IBNR burden is negligible.

Due to the focus on more profitable segments and the lack of a
significant IBNR burden, we expect the Company to reach a
sustainable RoE of 22%. Considering the sustainable RoE and
terminal growth rate of 7%, the 2016E P/BV multiple of 1.38x is
below the justified P/BV multiple of 2x.

Main risk for the Company is a regulatory change in MTPL
segment, which could set a market share parity rule. Such a
regulation would imply that a company’s market share in MTPL
segment would be consistent with its total market share. Although
it is not clear whether such a regulation would be enacted or not,
companies with low exposure to MTPL segment such as Aksigorta
would be negatively effected by such a regulation.
Anadolu Sigorta (ANSGR, MP): We initiate coverage of Anadolu
Sigorta (ANSGR.IS) with a “Market Perform” recommendation and a 12
month forward target price of TL2.00, indicating a 16% upside.

Anadolu Sigorta is one of the most successful companies among
insurers. The Company’s ongoing high exposure to the MTPL
segment raises concerns in the non-life insurance sector. It has a
high exposure to the motor segments. Note that MTPL and the
MOD segments constitute 23% and 29% of total GWPs,
respectively. Hence, the Company is vulnerable to the
deteriorating outlook in these segments.

Anadolu Sigorta will gradually book a c.TL222mn IBNR provision
until 2019, which will pressure its profitability.

Anadolu Sigorta’s strong outperformance compared to the BIST100 index, 30% YoY, may limit the further upside in the near term.
This outperformance is mainly attributable to its 20% stake in
Anadolu Hayat (ANHYT.IS, OP), which consists of 52% of our
valuation for Anadolu Sigorta.

The multiples confirm that the current valuation levels are fair as
Anadolu Sigorta’s shares trade at a trailing P/BV of 0.78x and at a
10% premium to its five-year historical average.

We project a gradual improvement in the Company’s operating
profitability. We expect its combined ratio decline to 103% levels
in our projection period from the current levels of 108.5%.

As the Company holds a 20% stake in Anadolu Hayat, prospective
positive developments in the private pension sector would
reinforce the share price. Note that we have an “Outperform”
recommendation for Anadolu Hayat’s shares with a 12-month
target price of TL6.50.
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March 29, 2016
RESEARCH
Turkish Non Life Insurance Sector
9
March 29, 2016
RESEARCH
Sector Overview
The Turkish non-life insurance sector offers a long-term growth potential
thanks to low density and underpenetration with low premium policy
prices except for the MTPL segment. However, the sector has not been
able to achieve satisfactory profitability in recent years due to the
changing domestic macroeconomic conditions and the impact of the
insurance regulations. The main reasons behind the low profitability are
low premium prices on the back of intensified competition, high exposure
to the loss making motor segment, high claims frequency and the
changing regulations. The sector had recorded a positive bottom line
both in 2014 and 2013 after the consecutive three years of net losses.
However, the bottom line is once again in the red in 2015. The sector
recorded a TL544mn net loss in 2015 due to the regulation change in the
IBNR methodology (incurred-but-not-reported), which required non-life
insurance companies to set aside a significant amount of technical
reserves.
Sector’s Profitability
1080
15%
720
10%
360
5%
0
0%
Net Profit
2015/12
2014/12
2013/12
2012/12
2011/12
-15%
2010/12
-1080
2009/12
-10%
2008/12
-720
2007/12
-5%
2006/12
-360
ROE (%) - rhs
Source: Insurance Association of Turkey
The sector’s technical margin has been 1% on average since 2010. Note
that this figure includes investment income which is booked under the
technical side. Excluding the positive contribution of the investment
income, the sector barely reaches a technical profit with its pure
insurance activities.
Sector’s Technical Profitability
1200
8.0%
800
6.0%
4.0%
400
2.0%
0
0.0%
Technical Profit
2015/12
2014/12
2013/12
2012/12
2011/12
2010/12
2009/12
-4.0%
2008/12
-800
2007/12
-2.0%
2006/12
-400
Technical Margin (%) - rhs
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March 29, 2016
RESEARCH
Growth in the sector is highly correlated to economic activity
Growth trends in the Turkish non-life insurance sector are in line
economic growth. Better growth prospects fuel demand for cars
houses, resulting in higher demand for insurance. Moreover, higher
capita income leads people to purchase health insurance policies
wider coverage.
with
and
perwith
Real Growth Trends
40.0%
Real GWP Growth
Real GDP Growth
30.0%
20.0%
10.0%
0.0%
-10.0%
2014/12
2013/12
2012/12
2011/12
2010/12
2009/12
2008/12
2007/12
2006/12
2005/12
2004/12
2003/12
2002/12
2001/12
2000/12
-20.0%
Source: Turkstat, Insurance Association of Turkey
According to our calculations, the coefficient of the regression between
the real GWP growth in the non-life insurance sector and real GDP
growth stands at 1.33x, meaning that we could expect 1.3% growth in
non-life GWP volumes per 1% GDP growth in the long term. Also, the
regression function has a R-square of 49%, implying that changes in
GDP growth could explain 49% of the variation in the changes in GWP
growth.
Correlation with Economic Growth
30%
y = 1.3393x + 0.0253
R² = 49%
25%
Real GWP Growth
20%
15%
10%
5%
0%
-6%
-4%
-2%
0%
2%
4%
-5%
6%
8%
10%
12%
Real GDP Growth
-10%
Source: Turkstat, Insurance Association of Turkey
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March 29, 2016
RESEARCH
Penetration levels are low when compared to peers
The Turkish non-life insurance sector has grown at a CAGR of 13%
between 2006 and 2015 in terms of GWPs. Despite the strong growth,
penetration levels are still low. As of end-2014, Turkey’s ratio of non-life
GWPs to GDP stood at 1.3%, much lower than the global average of
2.7%. Our projection is a 2% GWP/GDP ratio for Turkey as of 2024.
Regarding the density parameters, Turkey’s non-life insurance premium
per capita is USD 133, while the global average is USD 294. We
therefore believe that the Turkish non-life insurance sector offers a
strong growth potential in the long run.
Global Outlook in Non-Life Insurance
5000
Premium per capita (USD)
World Average
4000
3000
2000
1000
Thailand
Turkey
Bulgaria
Hungary
S.Africa
Malaysia
Brazil
Chile
Greece
Argentina
Czechia
Portugal
Spain
UK
US
Netherlands
0
Source: Sigma Re
Along with Turkey’s economic prospects, an improvement in insurance
awareness could fuel the non-life insurance density in the long term.
Therefore, we believe that the Turkish non-life insurance sector has
enough room for strong growth in the long run. Note that Turkey even
lags behind its emerging market peers, such as Bulgaria, Chile, Brazil,
Thailand and Argentina.
Penetration Levels
10.0%
GWP/GDP
World Average
8.0%
6.0%
4.0%
2.0%
Hungary
Greece
Turkey
Malaysia
Bulgaria
Chile
Czechia
Brazil
Thailand
Portugal
Argentina
UK
S.Africa
Spain
US
Netherlands
0.0%
Source: Sigma Re
12
March 29, 2016
RESEARCH
Market Structure
There are 38 companies operating in the non-life insurance sector in
Turkey. The market has a fragmented nature, driving the price
competition in recent years. Despite the fragmented market structure,
five major non-life insurance companies generated c.55% of the total
GWPs as of 2015. As a result, concentration in the sector is high.
i) Allianz is the market leader with a 15.3% market share and has an
especially strong presence in the health segment (a 44% market share
as of 2015). Allianz became the market leader in 2013 on the back of the
acquisition of Yapi Kredi Sigorta. ii) Anadolu Sigorta ranks second in the
non-life insurance market and has maintained its position in the market
in the past few years. iii) Axa follows Anadolu Sigorta and has a strong
presence in both the MTPL and MOD segments with 17% and 15%
market shares in those segments, respectively. iv) Mapfre had
transferred its health portfolio from its sister company and has a strong
presence in the MTPL segment with a 12% market share. v) Aksigorta is
the fifth company in terms of GWP volumes in the sector and has a
sustainable and diversified portfolio. It has been focusing on reducing its
MTPL exposure, leading to a 1.7pp total market share loss in 2015.
Market Shares
18.0%
15.3%
14.4%
13.7%
11.6%
10.8%
8.0%
7.2%
6.1%
3.6%
0.0%
2011
Axa
2012
Anadolu Sigorta
2013
2014
Allianz
Aksigorta
2015
Mapfre
Foreigners have a strong interest in the Turkish non-life insurance sector
and there have been several large-scale purchases since 2006 at
lucrative prices. Currently, foreigners have shares in 26 out of 38
companies in the Turkish non-life insurance sector either directly or
indirectly. The share of foreigners in the non-life insurance sector is 73%
in terms of ownership, while companies with foreign capital generate
c.65% of the GWPs in the sector. However, M&A activities have slowed
down following the sale of Yapi Kredi Sigorta to Allianz in 2013. The only
M&A activity has been the sale of Aviva Sigorta to Kibele BV in end2014. Many of the companies invested in by foreigners have not been as
profitable as expected or have recorded losses due to the systematic
risks in the non-life insurance sector. Hence, we may experience exits
and consolidations in the coming periods with lower valuation levels in
contrast to those observed in the past.
13
March 29, 2016
RESEARCH
Foreign Transactions
Company
Basak Sigorta
Basak Emeklilik
Ihlas Sigorta
Seker Sigorta
Isvicre Sigorta
Ray Sigorta
Garanti Sigorta
Genel Sigorta
Axa Oyak
Axa Oyak Hayat
Koc Allianz
Guven Sigorta
Guven Hayat
Fiba Sigorta
Ak Sigorta
Yapi Kredi Sigorta
Yapi Kredi Emeklilik
Aviva Sigorta
Market Share
Acquirer
5.1%
Groupama
13.3%
1.4%
HDI International
1.6%
Liberty Group
6.9%
Ergo Group
3.2%
TBIH
4.5%
Eureko
3.5%
Mapfre
12.2%
Axa
12.2%
9.1%
Allianz SE
2.4%
Groupama
1.2%
2.6%
NKSJ
7.4%
Ageas
7.2%
Allianz
6.7%
0.8%
Kibele BV
Acquired Stake
57%
41%
100%
64%
75%
58%
80%
80%
36%
50%
43%
99%
99%
93%
31%
94%
80%
99%
Price
Year
268mn USD
2006
17mn Euro
n.a.
n.a.
81mn USD
365mn Euro
565mn USD
2006
2006
2006
2007
2007
2007
525mn USD
2008
248mn Euro
2008
180mn Euro
2008
307mn USD
220mn USD
2010
2011
604mn Euro
2014
64mn USD
2014
Source: Anadolu Sigorta, Mergermarket
Agencies are the most utilized channels
Agencies constitute 66% of the total gross written premiums in the sector
as of end-2015. Agencies are followed by the bancassurance channel
(14%), brokers (12%), central sales (6%) and other channels (2%).
Agencies are mainly active in the motor segments, constituting 84% of
sales in the motor own damage (MOD) and 94% in the motor third party
liability (MTPL) segment. Taking the profitability of non-motor products,
we believe that a shift from agencies to the bancassurance channel
could improve the profitability of non-life insurance companies via
offering more lucrative segments.
Channel Breakdown
100%
80%
11%
11%
12%
2%
12%
2%
12%
14%
14%
14%
14%
14%
69%
69%
69%
67%
66%
7%
6%
6%
5%
6%
60%
40%
20%
0%
2011
Others
2012
2013
Brokers
Bancassurance
2014
Agencies
2015
Central
14
March 29, 2016
RESEARCH
Especially bank-affiliated insurance companies have the potential to
decrease their reliance on the agencies’ channel. Note that the bank
affiliated major non-life insurance companies are Ziraat Sigorta (Ziraat
Bank), Eureko (Garanti Bank), Anadolu Sigorta (Isbank), Allianz (Yapi
Kredi), Aksigorta (Akbank), Zurich (TEB), Halk Sigorta (Halkbank) and
Gunes Sigorta (Vakifbank). Also, Axa has bancassurance agreements
with Alternatifbank, Aktifbank, Burgan Bank, HSBC, ING Bank and
Odeabank. In terms of the bancassurance channel utilization, Ziraat
Sigorta, Eureko and Zurich are effective companies. On the other hand,
we believe that Anadolu Sigorta and Aksigorta may further enjoy their
affiliated banks’ wide branch networks going forward.
Bancassurance is a profitable channel for non-life insurance companies.
Insurance products sold via the bancassurance channel mainly consist
of non-motor products, such as healthcare, fire & natural disasters,
mandatory earthquake insurance and property. Note that the loss ratios
of these products are lower than those of the motor segments and these
products deliver technical profits. Moreover, effective utilization of the
bancassurance channel increases the bargaining power of non-life
insurance companies against agencies in commission expense
negotiations.
Utilization of Bancassurance Channel
100%
92%
80%
55%
60%
53%
40%
12%
12%
9%
4%
Anadolu
Allianz
Axa
17%
20%
Gunes
28%
Aksigorta
Halk
Zurich
Eureko
Ziraat
0%
Share of bancassurance channel in company premiums
15
March 29, 2016
RESEARCH
Segments
It is wise to evaluate the Turkish non-life insurance segment by dividing
the segments into motor and non-motor. The motor segment mainly
consists of Motor Third Party Liability (MTPL) and Motor Own Damage
(MOD). The major constituents of the non-motor segment include health
insurance, property damage and the fire and natural disaster segments.
High exposure to the motor segment is one of the main characteristics of
the Turkish non-life insurance sector. Total exposure to the motor
segment remained stable between 2010 and 2015 (2010: 47% vs 2015:
47%).
Segment shares
Others
13%
MTPL
21%
Health
13%
Health
14%
Propert
y 8%
Others
12%
MTPL
27%
Propert
y 11%
MOD
26%
Fire
17%
MOD
20%
Fire
16%
2010
2015
High exposure to the motor segments pressures non-life insurers’
bottom lines due to the high claims frequency, low policy prices and
increased reserve requirements. Within the motor segment, the MOD is
a profitable segment with an average 13% technical profit margin during
last 3 years, while losses mainly result from the MTPL segment. On the
other hand, property, fire and natural disaster and health segments have
generated technical profits during the recent years. Hence, we believe
that the degree of exposure to the motor and non-motor segments is a
key differentiating factor among non-life insurance companies.
Technical Profit Margins by Segments
30%
MTPL
20%
MOD
10%
0%
Fire &
N.Disaster
Property
-10%
-20%
Health
-30%
Total
-40%
2015/12
2014/12
2013/12
2012/12
2011/12
2010/12
-50%
16
March 29, 2016
RESEARCH
MTPL segment
Motor Third Party Liability (MTPL) insurance is compulsory for all vehicle
owners and covers vehicle owner’s liabilities for all bodily damages to
third persons and financial damages to other vehicles. The MTPL
segment constitutes 25% of the sector’s gross written premiums. As a
result, profitability trends in the segment directly affect the sector’s
bottom line. Due to the irrational competition that has suppressed policy
prices, the high claims frequency, fraudulent activities, court decisions
and recent regulatory requirements regarding IBNR reserve calculations
took a significant toll on the profitability of the non-insurance sector. On
the back of significant losses, non-life insurance companies have started
to increase policy prices significantly in 2015, triggering complaints
among policyholders and drawing public attention.
MTPL policy prices had been determined by the regulator, but a steady
liberalization process started in 2007. Policy prices began to be fully
determined by market participants since 2014. Due to the fragmented
structure of the sector and the nature of the product, policy prices had
remained subdued in the market. Note that MTPL insurance covers the
policyholders’ liabilities to third parties. Since the beneficiary of the
MTPL insurance is not the policyholders themselves, policyholders are
keen to seek low prices in MTPL segment. Therefore, price elasticity is
high. All in all, non-life insurance companies recorded significant losses
in this segment, amounting to a TL7bn technical loss during the last
decade. Although average premium prices rose by 93% since the
beginning of 2015, the current price levels could not fully offset the
losses, leading to suppressed technical margins.
Average Prices and Loss Ratios in MTPL Segment
135%
720
630
123%
540
450
111%
360
99%
270
180
87%
90
Average Premium Prices (TL) - rhs
2016/03
2015/12
2014/12
2013/12
2012/12
2011/12
0
2010/12
75%
Loss Ratios
Source: Insurance Association of Turkey, Insurance Information and Monitoring Center
Recent IBRN regulations continue to hurt the bottom line
The sector started to book IBNR provisions in 2010 and there have been
two major regulatory changes regarding the IBNR calculations in recent
years. In 2012, the regulator changed the calculation of claim reserves
and companies highly exposed to the MTPL segment with low reserves
were forced to increase their IBNR provisions. Also, the responsibility of
17
March 29, 2016
RESEARCH
medical treatment was transferred from non-life insurers to the Social
Security Institution (SSI), which orders non-life insurers to deliver 10% of
the MTPL policy premiums to the SSI. Due to the fact that the delivered
portion of the premiums exceeded the cost of medical treatment and
court decisions ruling that insurance companies would have to
compensate the cost of medical treatment that is not coved by SSI, the
profitability of non-life insurance companies suffered.
New regulations regarding the calculation of IBNR reserves were
announced on December 4, 2014 and were put into effect by January 1,
2015. Companies are allowed to calculate their IBNR by their actuaries.
Due to the under provisioned position of the sector, companies have
started to set aside significant IBNR reserves, which resulted in a
TL1.85bn technical loss in the MTPL segment as of 9M15. Total
additional reserve requirement resulting from the latest change in IBNR
regulations are expected to be TL4-5bn. Due to the heavy negative
impact on the bottom lines, non-life insurance companies having a
solvency ratio close to threshold levels are facing capital adequacy
problems. The Treasury relaxed the regulation on February 29, 2016
allowing companies to book their IBNR deficits gradually within five
years.
New regulation changes on general conditions, effective since June
1, 2015:




Although MTPL insurance covers losses resulting from damages
to third persons and financial damages to other vehicles, some
courts have ruled that relatives of the policyholder who is at fault
be compensated under the loss of support notion. These
indemnity payments are applied to all cases dating back to the last
10 years. With the new regulations on general conditions,
indemnity payments to the relatives of the faulty drivers are
excluded in these changes. However, the court approach to these
cases is not yet clear.
New regulations on June 1, 2015 also took the loss of the value of
the car as coverage. There is a 25% cap in the loss of value
cases.
According to the new regulations, insurers will be able to use
equivalent parts in auto repairs.
The mortality table to be used for indemnity payments was
determined as TRH2010, which includes higher life expectancy
assumptions, leading to higher provisions.
Changes in the loss of value and mortality table have led to cost
increases in the MTPL segment.
The government intends to make changes to the MTPL segment
The Minister of Transportation Binali Yildirim also confirmed that the
government is dedicated to making regulatory changes in the MTPL
segment and a unification of the MTPL and MOD segments is one of the
options. However, Deputy Prime Minister Simsek had previously said
that the unification of both insurance segments was not an option due to
the different nature of those policies. Recall that MOD insurance
18
March 29, 2016
RESEARCH
compensates damages or losses to policyholders’ vehicles created by
the possessor of the vehicle in a sudden and unforeseeable loss event
or losses that have been created by third persons. On the other hand,
MTPL insurance is a compulsory product and is designed to cover
losses resulting from damages to third persons and financial damages to
other vehicles.
The government has prepared a draft that prevents payments to faulty
drivers and standardizes compensation calculations in bodily injury
cases. However, the new draft does not preclude claim payments related
to cases exceeding the past 10 years. Note that retroactive claim
payments are one of the main reasons leading to the pressure on the
sector’s profitability. Therefore, such a solution would not entirely
alleviate the problem arising from the MTPL segment.
Separately, Treasury has been working on some changes aimed at
reducing premium prices. The regulator is said to shift to a system under
which premium prices would be determined by a tariff. Moreover,
Treasury targets to force companies to sell MTPL policies under a
market share parity adjustment. According to the adjustment, market
shares of insurance companies’ in MTPL segment would be consistent
with their total market share. Especially companies with low exposure to
MTPL segment such as Aksigorta would be negatively effected by such
a regulation. We expect that Treasury will make changes to the MTPL
system. However, the content of these changes is not yet clear. Due to
the varying proposals, the ongoing uncertainty regarding the nature of
the regulatory changes and conflicts of interest between companies and
clients, we did not include such scenarios in our valuation. Regulatory
risks are still a discount factor for the sector, which include both upside
and downside risks. We believe that a solution which would decrease
the provisioning requirements of non-life insurers would be a strong
catalyst for the companies. However, a populist approach to the problem
could worsen the situation.
Minimum wage increase
The minimum wage was increased by 30% to TL1,300 as of January 1,
2016. The minimum wage increase has imposed a burden on both the
MTPL and MOD segments. Regarding the MTPL segment, the major
negative impact resulted from higher provisioning expenses for bodily
injury claims. Note that if a client’s income level is not specified properly,
as is the case for the majority of policyholders, their expected future
income level is calculated based on the minimum wage. Consequently,
claim provisions are calculated based on a client’s life expectancy and
expected income. A 30% increase in minimum wage would thereby
require additional provisions for those cases.
Along with the additional provisioning requirement, 70% of the total costs
in the motor segments (both MTPL and MOD) are made up of spare
parts, while the remaining 30% is comprised of labor costs. Most of the
labor costs are based on the minimum wage.
19
March 29, 2016
RESEARCH
Motor Own Damage (MOD) segment
MOD insurance is a voluntary product and offers financial protection for
insurer’s vehicles. MOD products mainly compensate for losses resulting
from traffic accidents and coverage can expand to other risks depending
on the type of the policy between insurer and the client. In the MOD
segment, the price sensitivity of clients is low compared to the MTPL
segment because MOD policies provide protection for clients’ own
vehicles, not those of third parties.
The MOD segment generated TL3.9bn in gross written premiums in
9M15 and has a 21% share in the non-life insurance sector, ranking
second after the MTPL segment. On the other hand, the MOD segment
generated a 10% technical profit margin in the same period and is a
profitable segment for non-life insurance companies in contrast to MTPL.
The MOD segment became profitable in 2013 and thereafter on the back
of the clarification of contentious issues between insurers and clients,
such as the use of spare parts in repairs. The segment’s loss ratio had
averaged to 79% between 2010-2012, while the loss ratio fell to the 62%
levels between 2013 and 2014. The significant decline in the loss
enables non-life insurers to enjoy technical profits again. However, the
loss ratio increased by 7pp to 70% as of 9M15, mainly on the back of the
TL depreciation, leading to higher costs for imported spare parts.
Technical Profitability and Loss Ratio in MOD Segment
1000
100%
800
600
80%
400
60%
200
40%
0
-200
-400
20%
Technical Profit
2015/09
2014/12
2013/12
2012/12
2011/12
2010/12
0%
Loss Ratio - rhs
Non-Motor Segments
The non-motor segment mainly consists of general losses, fire & natural
disasters, health and other categories. The total share of total non-motor
categories in the non-life insurance sector stands at 53% as of 9M15. On
the flip side, the non-motor insurance segments provide positive
contributions to the total technical profit of the non-life insurance sector.
During the last six years, the non-motor segments’ average technical
profit margin stood at 8.6% vs. the sector’s 0.9% margin in the same
period.
20
March 29, 2016
RESEARCH
Technical Profitability of Non-Motor Segments
1600
1400
1200
1000
800
600
400
200
0
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2010/12
2011/12
2012/12
2013/12
Non-motor technical profit
2014/12
2015/09
Non Motor Technical profit margin - rhs
Gaining a strong market share in the non-motor segment has become a
strategic target for non-life insurance companies, especially after the
significant losses recorded in the MTPL segments. Hence, companies
enjoying a strong position in the non-motor segments will have better
profitability and compensate for their losses in the motor segments.
There is a concentration in the non-motor segments with the top 10
companies commanding 78% of the non-motor market. Allianz is the
market leader with a 15% market share, followed by Anadolu Sigorta
(13% market share) and Aksigorta (8% market share).
Market Structure in Non-Motor Segments
16%
Non-Motor Segment Market Shares
14%
12%
10%
8%
6%
4%
2%
Acıbadem
Gunes
Eureko
Groupama
Ziraat
Mapfre
Axa
Aksigorta
Anadolu
Allianz
0%
21
March 29, 2016
RESEARCH
Companies
22
March 29, 2016
RESEARCH
Aksigorta
Outperform
Turkey - Equity - Non-Life Insurance Sector
Initiation of Coverage
Reaping what it has sown
Current Price (TL)
2.40

Potential Return
27%


Aksigorta is a strong candidate for a re-rating story considering:
i) its improved profitability prospects with a 22% sustainable
RoE in the long run and ii) currently depressed valuation levels
with a 41% underperformance compared to the BIST– 100
index during the last two years.
Aksigorta reflected most of its IBNR burden to its financials and
significantly reduced its exposure to the MTPL segment, which
will enable the Company to become more profitable compared
to peers in the coming years.
We are initiating coverage for Aksigorta (AKGRT.IS) with an
“Outperform” recommendation and a 12-month forward looking
target price of TL2.40, indicating a 27% upside.
1.89
Current Mcap (TLmn)
578
Current Mcap (USD mn)
201
Stock Market Data
Bloomberg/Reuters:
AKGRT.TI / AKGRT.IS
1 mth
3 mth
6%
1%
52 Week Range (TL):
12mth
-13%
1.54 / 2.43
0.2
YTD TL Return:
13%
0.80
Shares Outstanding (mn):
Moving away from the MTPL segment
Aksigorta significantly reduced its MTPL exposure in 2015. The
Company’s exposure to the MTPL segment declined by 12pp since
2012. We believe that a focus on the profitable segments would be a
differentiating factor for Aksigorta. Moreover, as of February 2016
the regulator has allowed companies to reflect the IBNR burden over
a five-year time span. Contrary to its peers, Aksigorta chose to book
most of its IBNR burden. Declining exposure to the MTPL segment
and a greater focus on the bancassurance channel could solidify the
Company’s profitability compared to its peers.
Time to achieve sustainable profits
Due to the significant decline in the IBNR burden and the shift in the
portfolio from MTPL to other profitable segments, Aksigorta will
exhibit a strong operating performance in the coming periods. We
forecast the Company to record a TL72mn net profit in 2016 and to
reach a 22% sustainable RoE in the long term.
Attractive valuation levels
Aksigorta trades at a 2016E P/BV of 1.38x, which is a lucrative level
considering the Company’s strong RoE levels.
Catalysts
A proposal that could relieve the provisioning requirement of
insurers, clarify the legal process in faulty driver cases and prevent
frauds will lead to a decline in premium prices and make companies
more profitable. Such a solution to the MTPL segment will allow
investors to look more favorably upon the non-life insurance sector.
Valuation & Risks
We employed both a dividend discount model and residual income
model for Aksigorta’s valuation. Accordingly, our 12-month forward
looking target price stands at TL2.40, implying a 27% upside
potential. The main risks include regulatory risks in the MTPL
segment, which could force companies to more or less have
consistent market shares in both the MTPL segment and in the
insurance sector in general. Further risks would include a
government intervention in premium prices, a slowdown in consumer
loan growth and limited liquidity for Aksigorta’s shares.
306
Foreign Ow nership in Free Float (%):
Current
12M ago
74%
75%
The Com pany in Brief
Aksigorta was established in 1960 to offer non-life insurance
services to both corporate and retail customers. The main
insurance products that Aksigorta offers include health,
travel, MOD, MTP L, compulsory earthquake and liability.
The Company operates in all regions in Turkey. Aksigorta’s
sales channels consist of more than 2,000 agencies, 990
Akbank branches, 69 brokers and 3,600 contracted
institutions.
Shareholders Structure
Sabanci Holding
36%
Ageas
36%
Free Float
28%
2014
2015
2016E
31
-135
72
97
Growth (%)
-80%
n.m.
n.m.
35%
GWP (TL mn)
1,714
1,622
1,817
2,109
Growth (%)
12%
-5%
12%
16%
-31
-249
-6
27
n.m.
-699%
98%
n.m.
Technical Margin
-2%
-15%
0%
1%
Claims Ratio
73%
89%
69%
67%
103%
122%
101%
98%
18.6
n.m.
8.0
6.0
P/BV (x)
1.1
1.7
1.4
1.2
P/GWP (x)
0.3
0.4
0.3
0.3
ROAE
6%
-31%
19%
22%
0.10
-0.44
0.23
0.32
Net Income (TL mn)
Growth (%)
Combined Ratio
P/E (x)
EPS (TL)
2017E
Research Analyst: Cem Emre Bilgin
Sales Contact:
+90 (212) 384 1139
+90 (212) 384 1155-58
icm@garanti.com.tr
23
March 29, 2016
RESEARCH
SUMMARY FINANCIALS
Income Statement (TL mn)
2013
2014
2015
2016E
2017E
2018E
Gross Written Premiums
1,526
1,714
1,622
1,817
2,109
2,422
Net Earned Premiums
1,035
1,190
1,157
1,198
1,394
1,609
Other Technical Income
8
15
9
10
10
10
Total Technical Income
1,043
1,205
1,167
1,207
1,404
1,619
Claims
-660
-863
-1,032
-821
-929
-1,060
Operating Expenses
-287
-325
-333
-341
-392
-461
Other Technical Expenses
-46
-48
-51
-51
-56
-54
Total Technical Expenses
-993
-1,236
-1,416
-1,213
-1,376
-1,575
Technical Profit
50
-31
-249
-6
27
44
Net Investment Income
64
86
100
113
114
126
Other Income/Expense
71
-16
15
-17
-20
-23
Profit Before Tax
185
39
-135
90
121
147
Tax
-26
-8
0
-18
-24
-29
Net Income
160
31
-135
72
97
118
Balance Sheet (TL mn)
2013
2014
2015
2016E
2017E
2018E
Cash and marketable securities
901
902
1,061
1,025
1,138
1,263
Receivables
301
333
405
438
473
511
Participations
8
8
8
9
9
10
Fixed Assets
31
51
61
67
75
83
Other Assets
306
347
345
385
429
478
Total Assets
1,547
1,641
1,880
1,923
2,123
2,344
Payables
150
147
213
228
244
261
Technical Reserves
796
921
1,105
1,270
1,425
1,600
Other Liabilities
69
65
213
232
229
217
Total Liabilities
1,015
1,133
1,531
1,503
1,654
1,816
533
508
349
421
469
528
Total Liabilities & SHE
1,547
1,641
1,880
1,923
2,123
2,344
Key Ratios
2013
2014
2015
2016E
2017E
2018E
Shareholders' Equity
ROE
33%
6%
-31%
19%
22%
24%
Technical Margin
3.3%
-1.8%
-15.4%
-0.3%
1.3%
1.8%
Claims Ratio
63.9%
72.5%
89.2%
68.5%
66.6%
65.9%
Expense Ratio
31.4%
30.7%
32.3%
32.0%
31.5%
31.4%
Combined Ratio
95.2%
103.3%
121.5%
100.5%
98.1%
97.3%
24
March 29, 2016
RESEARCH
Investment Case
We initiate coverage of Aksigorta (AKGRT.IS) with a “Outperform”
recommendation and a 12-month forward looking target price of TL2.40,
indicating a 27% upside. Due to the significant shift in Aksigorta’s nonlife insurance portfolio and no significant IBNR provisioning burden
related to the past, we believe it will become very profitable in the near
future (22% sustainable RoE).
Along with the better profitability outlook, its current valuation levels and
significant underperformance during the last two years (41%
underperformance compared to the BIST-100) make Aksigorta a strong
candidate for a re-rating story, in our opinion.
The worst in the MTPL segment is behind, focusing on profitability
Aksigorta booked most of the IBNR burden amounting to TL220mn in
2015. Therefore, the Company will not suffer from the provisioning
burden deriving from the regulation change at end-2014. The remainder
of the IBNR provision amounting to TL34mn will be gradually reflected in
the coming years. Moreover, the Company successfully shifted its
portfolio from the loss making MTPL segment to other segments, while
focusing on the bancassurance channel. We believe that the Company
will enjoy a higher profitability compared to other non-life insurance
players in the coming periods. We forecast 19% and 22% RoEs in 2016
and 2017, respectively. A declining exposure to the MTPL segment and
a greater focus on the bancassurance channel will solidify the
Company’s profitability compared to its peers.
Multiples are attractive, taking profitability into account
Aksigorta trades at a trailing P/BV of 1.63x and at a 6% premium to its
five-year historical average. Its current valuation levels in terms of P/BV
are in line with its historical averages. On the flip side, considering its
22% sustainable RoE, its justified P/BV multiple stands at 2x , implying a
strong upside from current levels. Aksigorta also trades at a 2016E P/BV
multiple of 1.38x. In terms of the trailing P/GWP multiple, Aksigorta
trades at 0.36x, close to the -2 standard deviation levels during last five
years.
AKGRT - Trailing P/BV multiple (5-year)
AKGRT– Trailing P/GWP multiple (5-year)
2.20
0.75
1.94
0.65
1.68
0.55
1.42
0.45
1.16
0.35
Source: Rasyonet
Average
+2 std
+1 std
-2 std
P/GWP
-1 std
Average
+2 std
03.16
09.15
03.15
09.14
03.14
09.13
03.13
09.12
03.12
09.11
03.16
09.15
03.15
09.14
03.14
09.13
03.13
09.12
03.12
09.11
03.11
P/B
-1 std
03.11
0.25
0.90
+1 std
-2 std
Source: Rasyonet
25
March 29, 2016
RESEARCH
Premium growth to be in line with the sector average
We project a 14.1% CAGR in gross written premiums between 2016 and
2024, in line with our 15% CAGR in the sector’s GWP volumes in the
same period. We welcome Aksigorta’s efforts to strategically shift its
MTPL exposure to the non-MTPL segments, which could lower its
combined ratio and propel the Company forward in the non-life
insurance sector.
Excess capital has declined, but is still at safe levels
Aksigorta’s minimum equity stands at TL340mn, TL55mn in excess of
the required equity according to solvency calculations in accordance with
the regulations. Although the Company’s minimum equity is 119% of
required equity, the levels had been 188% in 2014 and 353% in 2013.
The main reason behind the erosion was the negative bottom lines. A
possible deteriorating outlook in the non-life insurance sector could
weigh on the Company’s bottom line and put pressure on its solvency .
Evolution of Excess Capital
400
400%
320
320%
240
240%
160
160%
80
80%
0
0%
2011
2012
2013
Minimum Equity - lhs
2014
2015
Required Equity - lhs
Minimum Equity/Required Equity
Source: Public Disclosure Platform
Risks
Regulatory risks
Recent premium increases in the MTPL segment have drawn public
attention and government officials are frequently expressing their desires
to find a solution. Several proposals are on the table, such as a
clarification of the legal processes in faulty driver cases, the
standardization of the calculation of compensation in bodily injury cases,
an intervention in prices and making it mandatory for companies to sell
more MTPL policies. As the Company tries to decrease its exposure to
the MTPL segment, the main risk would arise from the last proposal.
Although it is not clear whether the regulator would choose to make it
mandatory for companies to have consistent market shares in MTPL and
in the sector, such a regulation would require Aksigorta to increase its
exposure to the MTPL segment. Recall that Aksigorta’s total market
share is at the c.6.5% levels, while its market share in the MTPL
segment is above 1%.
26
March 29, 2016
RESEARCH
Depreciation in TL
Non-life insurance companies are negatively affected from depreciation
in TL due to the higher claim payments on the back of increasing prices
of spare parts. Although we expect a slight depreciation in TL in 2016, a
higher than expected decline in value of Turkish Lira would hurt
Aksigorta’s bottom line.
Consumer loan growth
The importance of the bancassurance channel has been increasing and
Aksigorta aims to increase the utilization of this channel. Note that
products sold through the bancassurance channel consist mainly of
profitable non-motor products. However, premium generation through
the bancassurance channel is correlated with consumer loan growth and
a slowdown in consumer loan growth and Akbank’s prudent stance on
this segment could pressure the premium generation. Currently, the FX
adjusted consumer loan growth (13-week moving average) stands at
6%.
Liquidity
The average daily trading volume over the last three months stands at
TL0.5mn and could precipitate illiquidity problems for institutional
investors.
A global fund holds a c.15% stake in the Company
Aberdeen Asset Management holds a c.15% stake in Aksigorta. A
prospective exit by the fund could pressure the Aksigorta’s shares.
27
March 29, 2016
RESEARCH
Valuation
We employed the Residual Income Model and Dividend Discount Model
for the valuation of Aksigorta. Accordingly, we reached a TL734mn 12month target value for the Company. Our 12-month forward target price
for Aksigorta stands at TL2.40, indicating a 27% upside potential.
Valuation Summary (TL mn)
Residual Income Model
Target Value
Weight
Contribution
Dividend Discount Model
738
50%
369
725
50%
362
12M Target Mcap
734
12M Target Price
2.40
Current Price
1.89
Upside Potential
27%
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
10%
5.5%
0.80
14.4%
7.0%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
10%
5.5%
0.80
14.4%
Book Value
Net Income
Equity Cost
Residual Income
Terminal Value of RI
Discount Factor
PV of Residual Income
349
-135
62
-196
421
72
55
17
469
97
64
33
528
118
72
46
594
131
81
50
666
144
91
53
728
138
100
37
790
138
109
29
855
145
118
27
0.90
15
0.79
26
0.69
32
0.60
30
0.53
28
0.46
17
0.40
12
0.35
9
923
151
128
23
334
0.31
110
Book Value
Participations
12M Target Mcap
12M Target Price
Current Price
Upside Potential
349
279
8
725
2.37
1.89
25%
RFR
ERP
Beta
CoE
Terminal Growth
Dividend Discount Model
Dividend Paid
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
0
0
49
59
66
72
76
76
80
83
0.90
0.79
0.69
0.60
0.53
0.46
0.40
0.35
0.31
0
38
41
40
38
35
31
28
395
Terminal Value of Dividend
1202
Discount Factor
PV of Dividends
0
Fair Value
645
12M Target Mcap
738
12M Target Price
2.41
Current Price
1.89
Upside Potential
28%
28
March 29, 2016
RESEARCH
Assumptions
Our risk-free rate assumption stands at 10%, while our equity risk
premium assumption is 5.5%. We used a 0.80x beta for the Company.
Accordingly, we reached a 14.4% cost of equity.
Growth: We project a 14.1% CAGR in gross written premiums between
end-2015-2024. Also, we expect the Company to preserve its current
market share of 6.1% during our projection period.
Profitability: We project the Company’s combined ratio to be 100.5% in
2016, while gradually declining to the 97% levels until 2020. Recall that
Aksigorta’s combined ratio was 122% in 2015 on the back of the
increase in IBNR provisions and provisions set aside after the minimum
wage hike.
Investment Income: We used a c.10% yield for the investment portfolio
between 2016-2020 and c.9% for the remaining years.
Payout ratio: We believe that the Company will try to increase its equity
in 2016. We do not project a dividend payment from 2015 and 2016 net
earnings. However, we expect Aksigorta to start to distribute dividends
from 2017 net earnings in 2018 and continue to do so going forward with
a 50% payout ratio, increasing to 55% in 2021 and thereafter.
Company Overview
Aksigorta was established in 1960 to offer non-life insurance services to
both corporate and retail customers. The Company operates in all
regions in Turkey. Aksigorta has 700 employees and 16 headquarters.
Aksigorta’s sales channels consist of more than 2,000 independent
agencies, 990 Akbank branches, 69 brokers and 3,600 contracted
institutions.
The main insurance products that Aksigorta offers include health, travel,
MOD, MTPL, compulsory earthquake and liability.
Shareholder structure
Shareholder Structure
28%
36%
Aksigorta is a joint venture between Sabanci Group and Ageas. Shares
of both Sabanci Holding and Ageas stand at 36%, while the remaining
28% of the shares trade on the BIST. Ageas is a Belgian insurance
company with 190 years of experience operating in Belgium, the United
Kingdom, Continental Europe and Asia. Ageas took over Aksigorta’s
31% stake from Sabanci Holding in 2011 and its total share in the
Company has increased to 36% since then. The total transaction amount
was USD 220mn in 2011, implying a 3.21x P/BV and 1.7x P/GWP
multiples at that time. Note that we expect a 2016E P/BV multiple of
1.38x and P/GWP multiple of 0.32x for Aksigorta’s shares.
36%
Sabanci Holding
Ageas
Free Float
29
March 29, 2016
RESEARCH
Trying to reduce its exposure to the MTPL segment
Due to the mounting pressures on the MTPL segment, Aksigorta has
wisely tried to decrease its exposure to this segment. While the MTPL
segment constituted 18% of the Company’s total GWPs in 2012 and
2013, Aksigorta began a gradual withdraw from the MTPL segment and
its exposure declined to 14% in 2014 and 6% in 2015. Not surprisingly,
the Company’s market share in the MTPL segment declined from 5% in
2013 to 1.4% as of end-2015. The Company aims to reduce its exposure
to the MTPL segment going forward and management expressed that its
market share will fall below 1% in 2016.
Aksigorta Segmental Breakdown
100%
80%
47%
51%
53%
56%
18%
18%
14%
31%
29%
30%
2012/12
2013/12
2014/12
64%
60%
40%
20%
17%
36%
6%
29%
0%
2011/12
Non-Motor
MTPL
2015/12
MOD
Financials mostly reflect the adverse impacts of the IBNR
regulation and minimum wage hike
Aksigorta fully reflected all of the additional provisioning requirement in
2015 on the back of the regulation change in the IBNR calculation
method in December 2014. Recall that most non-life insurance
companies chose to reflect the IBNR provisions within an extended
period of time (three years) in contrast to Aksigorta. Therefore,
provisioning expenses related to the IBNR calculation change will not
weigh on Aksigorta’s P&L going forward. Moreover, the negative impact
of the hike in the minimum wage for Aksigorta is calculated as TL62mn
and TL28mn of that amount was reflected in its 4Q15 financials. The
remaining TL34mn will be booked within two years. We believe that
Aksigorta’s decision to reflect most of the negative impacts resulting
from regulation changes and the minimum wage hike to be positive and
Aksigorta will become very profitable compared to its peers in the
coming period.
Combined Ratio Evolution
300%
250%
200%
150%
100%
50%
2011/12
2012/12
MTPL Combined Ratio
2013/12
2014/12
2015/12
Non MTPL Combined Ratio
Source: Public Disclosure Platform, Garanti Securities
30
March 29, 2016
RESEARCH
When calculating IBNR provisions, companies extrapolate historical
claim payments and try to forecast the average claim payments that
could occur in the future. Outliers are eliminated during the process to
make a proper estimate. Companies have some flexibility in determining
the threshold for outliers. The majority of non-life insurers exclude largescale claims, ending up with a low average claim payment assumption
for future cases, and set aside lower provisions. On the contrary,
Aksigorta sets a higher threshold for outliers. Therefore, it includes more
claim payments in the calculation of average claim payments, reaching a
higher average claim payment assumption. The Company’s cautious
stance reduces the risk of being underprovisioned in the future and we
welcome the Company’s conservative stance.
Enjoying strong operating performances in other non-life segments
excluding MTPL
Aksigorta’s gross written premiums rose by 3% YoY in 2015, excluding
the MTPL segment. Although the Company suffered from a TL136mn
net loss in 2015, Aksigorta’s non-MTPL segment’s net profit is TL109mn.
Taking into account the fact that Aksigorta has mostly reflected the
negative impacts resulting from IBNR reserves and the minimum wage
hike in 2015, the Company will highly likely to achieve profitability in
coming years. Although the Company’s combined ratio was 122% in
2015, it stood at 96% when we exclude the MTPL segment. Note that a
combined ratio below 100% means that the Company enjoys operating
profit from its insurance operations.
Lucrative agreements in private healthcare
Aksigorta has reached an agreement with Acibadem, a prominent
healthcare group with 18 hospitals and 13 outpatient clinics. According
to the agreement with the Acibadem Group, Aksigorta sells private
health insurance policies through its channels while underwriting and the
claim risk belongs to the Acibadem Group. Due to the Acibadem Group’s
cost advantages and Aksigorta’s widespread sales channels, the new
agreement will provide significant growth in the lucrative healthcare
segment without bearing the underwriting risk. Aksigorta gains
commission income from these policies.
We expect a gradual improvement in the combined ratio
The Company’s GWP volume contracted by 5% YoY in 2015, while that
of the sector grew by 16%. The main reason behind the slowdown in
Aksigorta’s GWP volume growth is the Company’s strategy to decrease
its exposure to the motor segments (especially MTPL). We welcome the
Company’s strategy as the uncertainty in the loss making MTPL
segments still continues. Accordingly, the Company’s market share
declined from 7.5% in 2014 to 6.1% in 2015, signifying a 1.4pp market
share loss. We forecast that Aksigorta’s market share will stabilize at
these levels in the mid-term until the MTPL segment becomes profitable.
In the long run, we project that the Company will achieve a GWP growth
of 14.1% CAGR until 2016, slightly below our estimate of 15% CAGR
market growth.
31
March 29, 2016
RESEARCH
Our projections
3,500
140%
120%
3,000
100%
2,500
80%
2,000
60%
1,500
40%
20%
1,000
0%
500
-20%
0
-40%
2014
2015
2016E
GWP volume - lhs
2017E
2018E
2019E
ROE
2020E
Combined Ratio
Source: Garanti Securities Estimates, Public Disclosure Platform
Weight of the bancassurance channel is increasing
Aksigorta reduced its exposure to the agencies in 2015, while the weight
of the bancassurance channel improved by 1pp in the same period. The
composition shift in the channels is not a surprise because agencies
mainly sell motor segment products (MTPL and MOD). We believe that a
declining exposure to the motor segment will lead to a higher utilization
of the bancassurance channel in the coming years. Recall that non-life
insurance products sold through the bancassurance channel mainly
consist of non-motor products, which have lower loss ratios and higher
profitability. Aksigorta’s market share in the bancassurance channel
stands at 9% as of end-2015, while Akbank, Aksigorta’s primary
bancassurance channel, commands a 12% market share in consumer
loans. Hence, it is reasonable to expect Aksigorta’s bancassurance
market share to converge to Akbank’s market share in consumer loans
in the long term.
Channel Breakdown
100%
80%
12%
13%
12%
13%
16%
17%
60%
57%
2014
2015
60%
40%
20%
0%
Direct Sales
Brokers
Bancassurance
Agencies
Source: Aksigorta, Insurance Association of Turkey
32
March 29, 2016
RESEARCH
Anadolu Sigorta
Market Perform
Turkey - Equity - Non-Life Insurance Sector
Initiation of Coverage
Not offering an attractive upside
High exposure to the loss making MTPL segment and the
outstanding IBNR burden outweighs the operational strength
of the Company in the non-MTPL segments.

Strong outperformance of shares, 30% YoY, limits a further
upside. Anadolu Sigorta trades at fair multiples; 2016E P/BV
multiple is 0.67x, while its core P/BV stands at 0.40x.

We initiate coverage of Anadolu Sigorta (ANSGR.IS) with a
“Market Perform” recommendation and a 12-month target
share price of TL2.00, indicating a 16% upside.
Strong market position Anadolu Sigorta ranks second in the nonlife insurance sector with a 13.7% market share, while Allianz is the
market leader with a 15% share. Thanks to the bancassurance
agreement with Isbank, brand awareness and achievement of
economies of scale, we believe that the company will maintain its
strong market position going forward.
High exposure to the motor segments The motor segments
constitute 52% of the Company’s total portfolio (MTPL: 23%, MOD:
29%). The Company has been gradually shifting its portfolio mix
since 2011 with a 4pp decline in the motor segments’ stake in the
total portfolio. The Company also began to withdraw from irrational
competition in the MTPL segment, choosing not to sell MTPL
policies that are not profitable. We project a gradual decline in the
combined ratio from the current 109% levels to 103% in 2020.
However, the current level of exposure is still high and leaves the
Company vulnerable to risks in these segments.
Multiples remain fair The Company’s 2016E P/BV stands at 0.66x,
while that of Aksigorta is 1.34x. The multiple discount is mainly
related to the lower RoE generation of Anadolu Sigorta (2016E
RoEs: ANSGR: 7% vs AKGRT: 19%). On a trailing basis, the P/BV
multiple of shares trade at a 9% premium to its historical average.
Strong participation portfolio Anadolu Sigorta has a 20% stake in
Anadolu Hayat (ANHYT, OP) and a 4.8% stake in Is REIC (ISGYO,
OP) which together comprise 57% of our valuation.
Catalysts i) A prospective solution in the MTPL segment, which
would decrease the provisioning burden, prevent frauds and clarify
legal processes in faulty driver cases would improve profitability. ii)
Positive developments in the private pension and life insurance
sector, such as the start of the auto-enrollment system and a new
regulation on severance payments could trigger an upward pricing in
Anadolu Sigorta shares due its Anadolu Hayat stake.
Valuation & Risks We employed the Residual Income Model for the
valuation of Anadolu Sigorta. Accordingly, our 12-month forward
looking target share price for Anadolu Sigorta stands at TL2.00,
indicating a 16% upside potential. The main risks include the
regulatory risks such as intervention to premium prices in the MTPL
segment, and which could require a market share parity between
MTPL segment and total sector, a slowdown in consumer loan
growth and limited liquidity of shares.

Current Price (TL)
1.72
2.00
Potential Return
16%
Current Mcap (TLmn)
860
Current Mcap (USD mn)
299
Stock Market Data
Bloomberg/Reuters:
ANSGR.TI / ANSGR.IS
1 mth
3 mth
-2%
-2%
52 Week Range (TL):
12mth
30%
1.31 / 1.72
0.1
YTD TL Return:
8%
0.80
Shares Outstanding (mn):
500
Foreign Ow nership in Free Float (%):
Current
12M ago
18%
15%
The Com pany in Brief
Anadolu Sigorta offers a wide non-life product mix such as
MTPL, MOD, residential fire, health, travel, enterprise,
general losses, property and so on. Anadolu Sigorta owns a
20% stake in Anadolu Hayat (ANHY T. IS) and a 4.8% stake
in Is REIC (IS GYO.IS ). The Company's distribution channel
consists of its headquarter, nine regional branches, one
overseas branch, 1.365 Isbank branc hes and 2.751
agencies, 25% of which are exclusive.
Shareholders Structure
Milli Reassurance
57%
Others
43%
2014
2015
2016E
72
64
77
96
6%
-11%
21%
24%
Net Income (TL mn)
Growth (%)
GWP (TL mn)
2017E
3,005
3,611
4,140
4,770
Growth (%)
9%
20%
15%
15%
-69
-173
-156
-133
68%
-150%
10%
15%
Growth (%)
Technical Margin
-2%
-5%
-4%
-3%
Claims Ratio
78%
82%
81%
80%
103%
108%
107%
105%
12.0
13.5
11.1
9.0
P/BV (x)
0.8
0.7
0.7
0.6
P/GWP (x)
0.3
0.2
0.2
0.2
ROAE
7%
6%
6%
7%
0.14
0.13
0.15
0.19
Combined Ratio
P/E (x)
EPS (TL)
Research Analyst: Cem Emre Bilgin
Sales Contact:
+90 (212) 384 1139
+90 (212) 384 1155-58
icm@garanti.com.tr
33
March 29, 2016
RESEARCH
SUMMARY FINANCIALS
Income Statement (TL mn)
2013
2014
2015
2016E
2017E
2018E
Gross Written Premiums
2,750
3,005
3,611
4,140
4,770
5,466
Net Earned Premiums
1,826
2,236
2,521
2,984
3,430
3,941
18
15
62
59
62
65
Other Technical Income
Total Technical Income
1,844
2,251
2,584
3,043
3,492
4,006
Claims
-1,346
-1,738
-2,057
-2,413
-2,729
-3,097
Operating Expenses
-463
-523
-605
-672
-770
-893
Other Technical Expenses
-57
-59
-95
-114
-126
-126
Total Technical Expenses
-1,866
-2,320
-2,757
-3,199
-3,625
-4,116
Technical Profit
-22
-69
-173
-156
-133
-111
Net Investment Income
122
174
262
268
271
282
Other Income/Expense
-32
-12
-24
-16
-18
-21
Profit Before Tax
67
93
66
97
120
150
Tax
0
-21
-2
-19
-24
-30
Net Income
67
72
64
77
96
120
Balance Sheet (TL mn)
2013
2014
2015
2016E
2017E
2018E
Cash and marketable securities
1,533
2,001
2,619
2,882
3,185
3,519
Receivables
777
803
939
1,014
1,095
1,182
Participations
368
391
495
533
565
599
Fixed Assets
98
127
143
159
176
195
Other Assets
477
483
692
772
860
959
Total Assets
3,253
3,805
4,888
5,359
5,881
6,455
384
350
400
428
458
490
1,851
2,282
2,934
3,305
3,670
4,118
Other Liabilities
105
121
352
775
836
843
Total Liabilities
2,340
2,754
3,686
4,080
4,506
4,960
913
1,051
1,202
1,279
1,375
1,495
Total Liabilities & SHE
3,253
3,805
4,888
5,359
5,881
6,455
Key Ratios
2013
2014
2015
2016E
2017E
2018E
Payables
Technical Reserves
Shareholders' Equity
ROE
8%
7%
6%
6%
7%
8%
Technical Margin
-0.8%
-2.3%
-4.8%
-3.8%
-2.8%
-2.0%
Claims Ratio
73.7%
77.7%
81.6%
80.9%
79.5%
78.6%
Expense Ratio
27.8%
25.3%
26.9%
25.9%
25.7%
25.5%
Combined Ratio
101.5%
103.1%
108.5%
106.7%
105.3%
104.1%
34
March 29, 2016
RESEARCH
Investment Case
We initiate coverage of Anadolu Sigorta (ANSGR.IS) with a “Market
Perform” recommendation and a 12-month forward target price of
TL2.00, indicating a 16% upside. Although Anadolu Sigorta is one of the
most successful companies among insurers, we believe that the
Company’s ongoing high exposure to the MTPL segment exposes the
systematic risk in the non-life insurance sector. Also, the strong 30%
YoY outperformance of Anadolu Sigorta’s shares compared to the BIST100 since the beginning of 2015 may limit a further upside in the near
term. This outperformance is mainly attributable to its 20% stake in
Anadolu Hayat (ANHYT.IS, OP), which comprises 52% of our valuation
for Anadolu Sigorta.
A gradual improvement in operating profits
Despite a 4pp contraction in the motor segments’ share in the total
portfolio exposure to the motor segments is still high. Motor segments
constitutes 52% of the total portfolio. The Company does not intend to
reduce its exposure to the MTPL line, while aiming to capture better
pricing and profitability in the segment. With better pricing and a
slowdown in claims, we forecast that the Company’s combined ratio will
decline to below the 103% levels by 2020 from the current 108.5%.
Accordingly, the Company will attain a sustainable RoE of 9%.
Multiples are at fair levels
Core P/B
-1 std
Average
+2 std
03.16
09.15
09.14
03.14
09.13
03.13
09.12
+1 std
-2 std
03.12
Average
+2 std
09.11
P/B
-1 std
03.11
0.15
03.16
0.45
09.15
0.25
03.15
0.55
09.14
0.35
03.14
0.65
09.13
0.45
03.13
0.75
09.12
0.55
03.12
0.85
09.11
ANSGR– Core P/BV multiple (5-year)
0.65
03.11
ANSGR - P/BV multiple (5-year)
0.95
03.15
Anadolu Sigorta trades at a 2016E P/BV multiple of 0.67x, while its core
2016E P/BV (excluding Anadolu Hayat and Is REIC shares owned by
the Company) stands at 0.40x. Recall that Aksigorta’s shares trade at a
2016E P/BV multiple of 1.38x, much higher than that of Anadolu Sigorta.
However, the main reason behind Anadolu Sigorta’s lower multiples is its
lower RoE compared to its peer. Taking the difference between profit
generation abilities of these companies into account, the multiple
discount of Anadolu Sigorta seems fair. From a historical perspective,
Anadolu Sigorta’s shares trade at a 10% premium to their five-year
historical averages in terms of P/BV, signifying that the level of the
current multiples is fair. Looking at the core P/BV multiple, which
excludes the Company’s stakes in Anadolu Hayat (ANHYT.IS) and Is
REIC (ISGYO.IS), the shares trade at a 17% premium to their five-year
historical average, confirming the fair valuation levels.
+1 std
-2 std
35
March 29, 2016
RESEARCH
Stakes in Anadolu Hayat and Is REIC add value
Anadolu Sigorta holds a 20% stake in Anadolu Hayat and 4.8% of Is
REIC’s shares. These participations comprise 57% of our valuation for
the Company (five-year historical average: 59%). Considering the fact
that the major contribution comes from market capitalization of Anadolu
Hayat, it is reasonable to expect a mean-reverting tendency between the
relative valuations of the two companies. Note that our recommendation
for Anadolu Hayat is “Outperform” with a 12-month target price of
TL6.50. Anadolu Hayat operates in the private pension and life
insurance sector. Taking the strong growth prospects into account in the
private pension sector, possible regulatory changes regarding autoenrollment and severance payments could trigger increases in Anadolu
Hayat’s value, which would have a positive impact on Anadolu Sigorta’s
shares.
ANSGR/ANHYT
0.50
0.44
0.38
0.32
0.26
ANSGR/ANHYT
-1 std
Average
+2 std
03.16
09.15
03.15
09.14
03.14
09.13
03.13
09.12
03.12
09.11
03.11
0.20
+1 std
-2 std
A solution to the problems in the MTPL segment will be a catalyst
Although the uncertainty in the MTPL segment is continuing , the
skyrocketing MTPL premium prices have drawn public attention. Non-life
insurance companies have also been lobbying for a decrease in
provisioning requirements and a clarification of bodily injury cases.
Although it is not included in our base case scenario, a reasonable
solution to the problems in the MTPL segment could alleviate the
provisioning burden of non-life insurers and reduce claim payments in
conflicting cases. A better outlook in the MTPL segment would trigger a
strong operating performance for the Company.
Solvency is at safe levels compared to the sector
The Company’s minimum equity was 30% in excess of the required
equity as of end-2015 (Aksigorta: 19%). Due to ongoing problems in the
motor segments weighing on the bottom lines of the non-life insurance
sector, several players have been faced with capital shortfalls. We
believe that Anadolu Sigorta’s excess capital functions as a buffer, but a
significant downturn could pressure its capital adequacy.
36
March 29, 2016
RESEARCH
Risks
Continuation of chronic problems in the MTPL segment
Recent premium increases in the MTPL segment drew public attention
and government officials have frequently been expressing their desires
to solve the problems. However, varying messages from the authorities
and ongoing conflicts of interest between companies and clients make
efforts to find a reasonable solution problematic. In an attempt to curb
the prices, the regulator put price caps on MTPL premiums for
commercial vehicles in September 2015. Commercial vehicles, such as
taxis, minibuses, buses and trucks are high risk group for MTPL
insurance and have a high claim frequency. However, such a price cap
makes it tough for non-life insurance companies. We believe that the
extension of such price caps without a reduction in claim and
provisioning burdens would further hurt the profitability of the sector.
While the motor segment’s share in Anadolu Sigorta’s portfolio has been
reduced by 4pp to 52% since 2011, its current exposure level is still high.
A further deterioration in the MTPL segment could weigh on operating
profitability.
Depreciation in the TL
Non-life insurance companies are negatively affected by the depreciation
in the TL due to higher claim payments on the back of the increasing
spare parts prices. Although we expect a slight depreciation in the TL in
2016, a higher than expected decline in the value of the TL would hurt
Anadolu Sigorta’s bottom line.
A slowdown in consumer loan growth
The importance of the bancassurance channel has been increasing and
Anadolu Sigorta aims to increase the utilization of this channel. Note that
products sold through the bancassurance channel consist mainly of
profitable non-motor products. However, premium generation through
the bancassurance channel is correlated with consumer loan growth and
a slowdown in consumer loans could pressure the premium generation.
Currently, the FX adjusted consumer loan growth (13-week moving
average) stands at 6%.
Exposure to participations
As discussed above, 57% of our valuation comes from the participations.
A deterioration in the life insurance and private pension sector, or a
change in the regulation, such as a change in the government’s
contribution to the private pension system, could trim the market value of
Anadolu Sigorta due to its 20% stake in Anadolu Hayat.
Liquidity
The average daily trading volume over the last three months has been
TL0.2mn and could precipitate illiquidity problems for institutional
investors.
An asset management company holds a 6.1% stake in the Company
Ergo Asset Management holds a 6.1% stake in Anadolu Sigorta.
Although the fund has a long-term perspective, a possible disposition of
Anadolu Sigorta’s shares could pressure the shares.
37
March 29, 2016
RESEARCH
Valuation
We employed the Residual Income Model for the valuation of Anadolu
Sigorta.
Accordingly, we reached a TL1,000mn 12-month target value for the
Company. Our 12-month forward looking target price for Anadolu Sigorta
stands at TL2.00, indicating a 16% upside potential.
Valuation Summary
Book Value
707
-328
Participations
495
12M Target Mcap
1000
12M Target Price
2.00
Current Price
1.72
Upside Potential
16%
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
RFR
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
ERP
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
5.5%
Beta
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
CoE
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
Terminal Growth
7.0%
Tangible Equity
707
746
810
896
977
1073
1204
1349
1510
1658
Core Net Income
46
59
76
100
125
146
158
173
193
181
Equity Cost
98
105
112
123
135
148
164
184
206
228
Residual Income
-53
-46
-36
-23
-10
-1
-6
-10
-13
-47
Discount Factor
0.90
0.79
0.69
0.60
0.53
0.46
0.40
0.35
0.31
-42
-28
-16
-6
-1
-3
-4
-5
-224
Terminal Value of RI
-681
Assumptions
Our risk-free rate assumption stands at 10%, while our equity risk
premium assumption is 5.5%. We used a 0.80x beta for the Company.
Accordingly, we reached a 14.4% cost of equity.
Growth: We project a 14.3% CAGR in gross written premiums between
end-2015-2024. Furthermore, we expect the Company to command a
market share of 13-14% in the long run.
Profitability: We project that the Company’s combined ratio will be
around 106.7% in 2016, while gradually declining to the 103% levels
until 2020. Recall that Anadolu Sigorta’s combined ratio was 108.5% in
2015 on the back of the increase in IBNR provisions.
Investment Income: We employed a c.10% yield for the investment
portfolio in 2016 and 2017 and c.9% for the remaining period.
38
March 29, 2016
RESEARCH
Company Overview
Anadolu Sigorta, Turkey’s first national insurance company, was
founded in 1925 with the initiative of Mustafa Kemal Ataturk, the founder
of the modern Turkish Republic. Anadolu Sigorta offers a wide non-life
product mix such as MTPL, MOD, residential fire, health, travel,
enterprise, general losses, property and so on. Anadolu Sigorta owns a
20% stake in Anadolu Hayat (ANHYT.IS) and a 4.8% stake in Is REIC
(ISGYO.IS). The Company utilizes all of Isbank’s branches (with 1,365
branches and 267 direct sales staff) and also has bancassurance
agreements with TSKB, Arap Turk Bank, Alternatifbank, Aktif Investment
Bank, Albaraka Turk and Finansbank. Anadolu Sigorta has 2.751
agencies, 25% of which are exclusive.
Shareholder Structure
Milli Reassurance Company owns a 57.3% stake in Anadolu Sigorta.
Note that Isbank (ISCTR, OP) owns 77% of Milli Reassurance.
The free float ratio of the total shares stands at 48% as of end-2015.
Those holding more than 5% of the shares are Ergo Asset Management
and Nemtas (Isbank’s 99.8% subsidiary), which hold 6.1% and 5.3%
stakes in the Company, respectively.
Strong market position
The Company ranks second in the non-life insurance sector in terms of
market share. It commands a 13.7% total market share as of end-2015.
In terms of segments, Anadolu Sigorta ranks first in six segments (MOD,
Fire & Natural Disaster, Personal Accident, Marine, Water Vehicles and
General Liabilities). The Company also has a strong presence in the
MTPL segment and is the third largest company in the sector.
Segment
MTPL
MOD
Fire & Nat. Disasters
Health
General Losses
Personal Accident
Other
Total
2014
780
824
503
280
239
80
298
3,005
2015
1,043
846
638
328
299
110
347
3,611
Growth (YoY)
34%
3%
27%
17%
25%
38%
16%
20%
Market Rank
3
1
1
4
3
1
n.m.
2
Exposure
29%
23%
18%
9%
8%
3%
10%
100%
Very exposed to motor branches
As of end-2015, the MTPL and MOD segments constitute 23% and 29%
of total GWPs, respectively. Accordingly, total exposure to the motor
segment was 52%. Although the share of the non-motor segment in total
written premiums has gradually increased since 2011 (a 4pp increase
between 2011 and 2015), the current levels of exposure to the motor
segments are still high). Hence, the Company is vulnerable to the
deteriorating outlook in these segments.
The Company also has a strong position in the profitable non-motor
segments, ranking number one in fire & natural disasters and personal
accident. Although the exposure to the personal accident segment is
comparably low (3%), the Company aims to solidify its position in this
segment through further utilization of the bancassurance channel.
39
March 29, 2016
RESEARCH
Segmental Exposure
100%
80%
44%
45%
45%
47%
48%
21%
22%
26%
26%
29%
35%
33%
30%
27%
23%
2011/12
2012/12
2013/12
2014/12
2015/12
60%
40%
20%
0%
Non-Motor
MTPL
MOD
The non MTPL combined ratio is at moderate levels
If we exclude the MTPL segment, the Company has achieved a TL63mn
technical profit in 2015, compared to the 8mn technical loss in 2014. The
Company’s combined ratio stands at 98% as of end-2015 if we exclude
the MTPL segment. Note that a combined ratio below 100% signifies
that earned premiums exceed claim payments and operating expenses.
Combined Ratio in MTPL and Non-MTPL segments
140%
130%
120%
110%
100%
90%
80%
2011/12
2012/12
MTPL Combined Ratio
2013/12
2014/12
2015/12
Non MTPL Combined Ratio
The TL222mn IBNR provision will be booked in the coming periods
On the back of the regulation change in December 2014, the Company
booked a TL127mn IBNR provision in 2015. In contrast to Aksigorta,
Anadolu Sigorta chose to allocate its IBNR provisioning gradually until
2019. A minimum TL222mn IBNR will be booked until 2019, which will
pressure the Company’s profitability.
40
March 29, 2016
RESEARCH
IBNR Reserves
700
600
222
500
400
300
437
200
310
100
186
0
2013
2014
2015
Source: Anadolu Sigorta
Growth in line with the sector
We expect Anadolu Sigorta to grow in line with the sector. We project a
14.3% CAGR between end-2015-2024, in line with the sector’s 15%
CAGR. Due to the strong bancassurance network, brand recognition and
customer retention ability it is reasonable to expect Anadolu Sigorta to
preserve its current market position going forward. We forecast a
gradual improvement in the combined ratio, which will stabilize at the
103% levels in the long run (2015 end: 109%) Accordingly, the Company
is likely to achieve a sustainable RoE of 9% in the long run.
Our Projections
8,000
120%
7,000
100%
6,000
80%
5,000
4,000
60%
3,000
40%
2,000
20%
1,000
0
0%
2014
2015
2016E
GWP volume - lhs
2017E
ROE
2018E
2019E
2020E
Combined Ratio
Source: Garanti Securities Estimates
41
March 29, 2016
RESEARCH
Utilization of the bancassurance channel is increasing
Anadolu Sigorta has a strategic relationship with Isbank and utilizes all of
Isbank’s branches for premium production. Having a bancassurance
agreement with Turkey’s second largest bank is a core advantage for the
Company. Gross written premiums generated through Isbank constitute
11% of the Company’s total GWP volumes. In line with the sector trend,
the weight of the bancassurance channel has been increasing. The
weight of the bancassurance channel has improved by c.2pp between
2011 and 2015, while that of agencies declined by c.4pp in the same
period. The decline in the weight of agencies in favor of the
bancassurance channel is positive for non-life insurance companies as
products sold through agencies mainly consist of the motor segment,
while products offered through bancassurance are in the non-motor
segment. Non-motor segment products have lower loss ratios compared
to motor segment products, so the effective utilization of this channel
solidifies profitability. We believe that Anadolu Sigorta has room to
increase its exposure to the bancassurance channel, which would be an
upside risk for the Company’s operating profitability.
Channel Breakdown
100%
3%
5%
8%
2%
5%
10%
3%
5%
9%
6%
2%
10%
7%
2%
10%
80%
9%
9%
10%
11%
11%
75%
74%
74%
72%
71%
2011
2012
2013
2014
2015
60%
40%
20%
0%
Indirect
Direct
Broker
Isbank
Agencies
42
Disclaimer
This document and the information, opinions, estimates and recommendations expressed herein,
have been prepared by Garanti Securities Research Department, to provide its customers with
general information regarding the date of issue of the report and are subject to changes without prior
notice. All opinions and estimates included in this report constitute our judgment as of this date and
are subject to change without notice.
This document and its contents do not constitute an offer, invitation or solicitation to purchase or
subscribe to any securities or other instruments, or to undertake or divest investments. Neither shall
this document nor its contents form the basis of any contract, commitment or decision of any kind.
Investor who have access to this document should be aware that the securities, instruments or
investments to which it refers may not be appropriate for them due to their specific investment goals,
financial positions or risk profiles, as these have not been taken into account to prepare this report.
Therefore, investors should make their own investment decisions considering the said circumstances
and obtaining such specialized advice as may be necessary. 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.
The market prices of securities or instruments or the results of investments could fluctuate against
the interests of investors. Investors should be aware that they could even face a loss of their
investment. Transactions in futures, options and securities or high-yield securities can involve high
risks and are not appropriate for every investor. Indeed, in the case of some investments, the
potential losses may exceed the amount of initial investment and, in such circumstances, investors
may be required to pay more money to support those losses. Thus, before undertaking any
transaction with these instruments, investors should be aware of their operation, as well as the rights,
liabilities and risks implied by the same and the underlying stocks. Investors should also be aware
that secondary markets for the said instruments may be limited or even not exist.
This report is to be distributed to professional emerging markets investors only. This report is for
private use only and intended solely for the individual(s). No information in this report may be copied,
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Additionally, with respect to our statements above, all our claims and plea rights are covered in the
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Garanti Securities
Etiler Mah. Tepecik Yolu
Demirkent Sokak No:1
34337 Besiktas, Istanbul / Turkey
Phone: +90 (212) 384-1155
Fax: +90 (212) 352-4240
Definition of Stock Ratings
OUTPERFORM (OP)
The stock's return is expected to exceed the return of the BIST100 in the next 12M.
MARKET PERFORM (MP) The stock's return is expected to be in line with the BIST100 in the next 12M.
UNDERPERFORM (UP)
The stock's return is expected to fall below the return of the BIST100 in the next 12M.
RESEARCH

Turkish Non-Life Insurance Sector

Transcription

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