European Insurance ETFs | Nomura overweight sector, bullish on Aviva, Axa, L&G, Swiss Life and Zurich

Aug 22nd, 2012 | By | Category: Equities

Investors have unfairly penalised the European insurance sector by rating it the same as banks, yet earnings and dividend growth are markedly superior and the risk profile different, according to a report from investment bank Nomura.

European Insurance ETFs | Nomura overweight insurance sector, bullish on Aviva (AV), Axa (CS), Legal & General (LGEN), Swiss Life (SLW) and Zurich (ZURN)

Investment bank Nomura has released a bullish report on the European insurance sector. Among their top picks is L&G.

Nomura is overweight financials through holdings in both banks and insurance, but recognises investor unease at making investments in the banking sector. However, the investment bank finds the reluctance to own European insurers harder to understand and believes the sector is due for a re-rating.

The report says: “If ever there was a case of investors being unwilling to discriminate sufficiently, we think that the case of financials at the moment is a case in point. While we happen to be overweight banks, we do understand the obvious concerns that investors might have in allocating to the sector. However, the insurance sector is, or at least should be, a different story. It does not have the same potential capital issues and yet we think it has been ‘tarred with the brush’ of the banks.”

FEATURED PRODUCT

DB X-tracker STOXX 600 Insurance ETF (XSIR)

– Tracks the STOXX 600 Insurance Index
providing targeted exposure to the European
insurance sector

– Major holdings include Allianz, Zurich,
Prudential, ING and Axa; holds all of Nomura’s
top sector picks

– Over-collateralised swap-based replication,
with full transparency to index constituents
and underlying collateral holdings

– UCITS compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs, TER 0.30%,
registered for distribution across most of EU

According to Nomura, the sector’s earnings have been particularly eye-catching: “The stand-out feature of the sector recently that deserves attention from a top-down perspective is that earnings have been growing well. We have seen a near-linear growth in sector EPS since May 2009, with 23% growth since then. Also, since December 2010 sector earnings have outgrown the market by 15%. This also contrasts with the situation in the banks sector.”

Moreover, these earnings have fed through to shareholders, with 9.3% growth in dividends over the past 12 months: “The sector yields 90bp of dividend yield more than the market (on average over the past 25 years it has yielded 50bp less than the market). We have pointed out recently that dividend yield is an attractive ‘factor’ to buy in the market and the increase of dividend payouts in the insurance sector (while dividends have been cut elsewhere) underlies their security.”

Then there is valuation: “The sector trades on a book multiple of 0.88x compared with an average 2.1x since 1988. This makes the sector a relatively inexpensive way to buy beta.” Nomura also notes that a book multiple of 0.88x is in line with the banks sector, despite insurance’s superior characteristics and less potential for capital risks.

As well as overweighting the sector in general, on individual names, Nomura likes Aviva (“attractively valued”), Axa (“offers compelling longer-term value”), Legal & General (“our top UK insurance pick”), Swiss Life (“attractive risk-return profile”) and Zurich Insurance Group (“dividend is well covered and provides for an attractive yield”).

An efficient and highly targeted way to gain exposure to the European insurance sector is via an exchange-traded fund (ETF). For UK-based investors favouring for a London-listed fund, perhaps the best options are the DB X-tracker STOXX 600 Insurance ETF from Deutsche Bank and the Amundi ETF MSCI Europe Insurance from Amundi (both detailed below). For Europe-based investors and/or those preferring a continental European listing, iShares, Lyxor, Source, EasyETF and ComStage all offer relevant products.

DB X-tracker STOXX 600 Insurance ETF (XSIR)
The DB X-tracker STOXX 600 Insurance ETF (XSIR) tracks the STOXX 600 Insurance Index. This index is represents the performance of the largest European companies the insurance sector as defined by the Industry Classification Benchmark (ICB). The index is derived from the STOXX 600 Index which covers Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxemburg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK. Major holdings include Allianz, Zurich, Prudential, ING and Axa; Aviva, Legal & General and Swiss Life are also held, along with 24 other European insurers. XSIR has a TER of 0.30% and is listed on the London Stock Exchange (LSE), Deutsche Börse (Xetra), Stuttgart Stock Exchange and Borsa Italiana.

Amundi ETF MSCI Europe Insurance (CI5)
The Amundi ETF MSCI Europe Insurance (CI5) tracks the MSCI Europe Insurance Index This index is represents the performance of the largest European companies the insurance sector as defined by the Global Industry Classification Standard (GICS). The index is derived from the MSCI Europe Index and currently includes companies from Austria, Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Switzerland and the UK. Major holdings include Allianz, Zurich, Prudential, Munich Re and Swiss Re. Axa, Aviva, Legal & General and Swiss Life are also held, along with 23 other European insurers. CI5 has a TER of 0.25% and is listed on the London Stock Exchange (LSE), Deutsche Börse (Xetra), NYSE Euronext and Borsa Italiana.

For investors seeking a European listing, in addition to the Amundi and Deutsche Bank products shown above, which are listed across various European exchanges as well as the LSE, the following products from ComStage, Source, Lyxor, EasyETF and iShares do much the same thing. Each of these five funds tracks the STOXX Europe 600 Insurance Index.

ComStage ETF STOXX Europe 600 Insurance (C070)
Listed on Deutsche Börse (Xetra), Stuttgart Stock Exchange and SIX Swiss Exchange. TER 0.25%

STOXX Europe 600 Optimised Insurance Source ETF (XIPS)
Listed on Deutsche Börse (Xetra). TER 0.30%

Lyxor ETF STOXX Europe 600 Insurance (INS)
Listed on NYSE Euronext Paris. TER 0.30%

EasyETF STOXX Europe 600 Insurance (SYI)
Listed on NYSE Euronext Paris. TER 0.33%

iShares STOXX Europe 600 Insurance ETF (DE) (EXH5)
Listed on Deutsche Börse (Xetra). TER 0.46%

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