CEE insurance stocks to get a boost from rising profits, Erste expects

CEE insurance stocks are expected to get a boost from rising profits, cheap valuation and stronger investor demand , as shows a report from Erste Group. European insurance stock prices will swing from slump in 2010 (-8.7%) to strong momentum in 2011, insurance stocks will be traded at attractive multiples, earning yields to stand strongly at 11.9 percent in 2011 and 12.8 percent in 2012 and Vienna Insurance Group will top pick – high CEE exposure, good multiples and strong balance sheet, continues the report.

“We see the European insurance sector as highly attractive at the moment, given that balance sheets are constantly improving and valuation is cheap, despite companies’ huge growth potential. As the business environment is also improving, all these factors will help steer the sector to strong stock performance in 2011. CEE insurance companies in particular will ride this wave of positive developments, as they additionally rely on a very good location in markets that are still underpenetrated. Our top pick is therefore VIG, which has a high CEE exposure and can thus benefit from rebounding growth in the region and an improved investor sentiment,” explains Christoph Schultes (in picture), Insurance Sector Analyst at Erste Group.

It seems, as the report continues, that 2010 was characterized by a remarkable catch-up of the overall economy, with Euroland expected to have achieved real GDP growth of 1.7 percent, after the slump of 4.1 percent in 2009. This favorable trend was reflected in DJ Euro Stoxx insurance companies’ 6.8 percent top line growth in the first nine months of the previous year.

On the other hand, 2010 was not a good year for insurance stocks. While most sectors in the Euro Stoxx Index recorded increasing share prices, the Insurance Index registered a price decline of 8.7 percent, which made it the fourth worst performing sector last year, as continues the same source. However, it should be added that The Euro Stoxx Insurance Index climbed by approximately 13 percent in January 2011, making the sector the second strongest (behind banks) in the current young year. Thus, the sector shows a clearly gaining momentum at present.

On what concerns valuation, the top pick remains Vienna Insurance Group. Erste Group analysts increase their target price to EUR 50 and therefore reiterate their Buy recommendation. Erste Group analysts upgrade their recommendation for PZU to Accumulate and reiterate their target price of PLN 400. Erste Group Research reiterates its Reduce recommendation for UNIQA, but slightly raises the target price to EUR 13.8 since a liquidity discount is no longer included.