VIG Upgraded by Raiffeisen

Published: October 17, 2011; 16:09 · (Vindobona)

Current talks of bank recapitalization can in the view of Raiffeisen Research be a positive trigger for the insurance sector.

VIG Upgraded by Raiffeisen / Picture: © Vienna Insurance Group / WIENER STÄDTISCHE Versicherung AG

A comprehensive recapitalization of banks stabilizes bank debt, reducing fears in the insurance sector - which is among the biggest holders of bank debt. At the current point of discussion with several options on the table to improve capital adequacy in the banking sector, some of them might be negative for the existing bank shareholders. Within the financial sector Raiffeisen Centrobank therefore favors insurance companies with limited exposure to Euro peripheral government bond holdings, hence limiting the effect of impairments. Consequently Raiffeisen upgrade Vienna Insurance Group (VIG) from “hold” to “buy” confirming their target price of € 36.50.

VIG holds a very limited amount of Euro peripheral debt. Total sovereign exposure amounts to €110m or 0.4% of total investments (including state guarantees for corporates €180-190m, 0.7% of total investments). A further write-down of Greek bond holdings representing a haircut of 50% would only cause a write-down of €10 m which would not be a bigger burden for FY 11e financials. VIG’s balance sheet looks strong with the Solvency I ratio exceeding 200% (approx. 220%) and Solvency II guided at 150% - 180% according to the QIS5 standard formula.

Guidance confirmed: Last week CEO Günter Geyer reiterated the guidance of a profit before tax increase of 10% this year. Raiffeisen Research sees this comment as positive, increasing confidence given latest market turbulences which have darkened the outlook for financial stocks.

A close look at Warta

Due diligence at Poland’s number 2 Warta is expected until year-end (VIG ranks number 3). Raiffeisen would qualify a takeover as positive given the improved market position on the Polish market and market consolidation in particular. Warta’s market share amounts to 9% in the non-life and 8% in the life segment, respectively. Non-life GWP reached approx. € 440m in 2010. Life premiums amounted to around € 580 m in 2010. At the end of 2010 shareholders’ equity reached approx. €325m VIG recently confirmed that no capital increase is necessary for a takeover which should be perceived well by investors.

Valuation & Recommendation

Raiffeisen Research sticks to their target price of €36.50 derived from a Dividend Discount Gordon Growth model and peer group comparison. Implying upside of more than 20%. Raiffeisen consequently upgrade the share to “buy” expecting rather defensive insurance companies (low Euro peripheral exposure, big non-life business) to benefit from stabilised bank capital.