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The Turkish insurance sector offers significant growth potential given the high population, low penetration and favorable demographics. Following several years of improvement, premiums have grown by an average of 36% over the past decade, despite turmoil in the global and local markets.
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In past years, the sector has attracted many foreign investors and witnessed several M&A transactions, in which most transactions have been made with significant premiums to involved companies' outstanding values; this confirms the level of trust earned by the Turkish industry. A bumpy road ahead depending on the cycle. Our outlook is for a challenging environment going forward, considering the uneven income distribution of the country, which is unlikely to change much in the short term - being the main risk for premium growth curbing sector development.
However, we think that efforts to increase insurance awareness will play an important role in the coming periods; and notwithstanding the challenges, premium growth could yet outperform quickly on the back of several factors such as: one of the lowest penetration (premium to GDP) levels compared to global standards, at 1.3% , as well as the relatively young population, favorable demographics, rising education levels, and increasing insurance awareness, which would support demand for insurance products. We forecast premium growth of around 20% in 2011, and 13% on average over the next five years, reaching TRY 17bn, which would lift insurance penetration (pension funds to GDP) to 2.5% by the end of 2016. Profitability: likely to remain weak in the short run. The Turkish insurance sector's weak profitability is primarily due to high loss ratios driven by the unprofitable motor segment. This segment wipes out the positive contribution made by some of the other insurance lines.
Despite the impressive growth trend and positive outlook for premium generation, the insurance sector's technical profitability is lackluster, and the short term outlook is not promising given the challenging business environment. In addition to technical profitability, insurance companies have in previous years relied on the very high yields of government bonds to compensate for weak technical profitability. Yet this option is no longer viable going forward.
We also argue that the insurance market will remain competitive in the short term, and that insurers' combined ratios, at 110% as of 2010, could only improve to below 100% over a medium term horizon. Valuation : The Turkish insurance sector has underperformed both the ISE and the banking index by 23% and 20% respectively since the beginning of the year. It actually registered a good start to 2010, on a 6% rise until March, 2011, however losing around 10% in cumulative terms as a result of the general sell-off in the market. We assign buy rating for Anadolu Sigorta and Anadolu Hayat and rate Aksigorta with a Hold rating. |
Source : balkans.com
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