RESEARCH

Transcription

RESEARCH

June 17, 2015
Sector Report
RESEARCH
Turkish Private Pension & Life Insurance Sector - Quality names
We initiate the coverage of the Turkish Private Pension and Life
insurance sector with an “Outperform” recommendation for both
Anadolu Hayat (24% upside potential) and AvivaSA (31% upside
potential). Both companies are operating in an underpenetrated
market with strong growth potential along with strong corporate
governance and skilled management. Indeed, the pension unit is the
core business for both companies as Anadolu Hayat and AvivaSA are
ranked as the 1st and 2nd private pension (PP) companies on the
basis of assets under management, and the importance of economies
of scale in the sector should not be underestimated. At the same
time, life insurance and private pension are complementary segments
in terms of profitability and growth. While the pension segment offers
a strong growth outlook, the life segment is set to remain a profitable
segment. We believe a CAGR of 20-25% in assets under
management is highly achievable in the PP sector between 2014 and
2024, especially given the annual inflation rates of 5-7%. Our figures
are somewhat conservative compared to the sector participants’
forecasts. A prospective transformation in the mandatory participation
and severance payment system would be the main catalysts for
growth. On the other hand, new arrangements announced on 25 May
2015 will put pressure on bottom lines in the short and mid-term;
however, simplification of the fee structure and participant-friendly
regulations will attract new participants and prolong contract
maturities. We believe that pension fund equities are defensive stocks
and play as hedging instruments especially during turbulent times
with low beta figures.
Anadolu Hayat: As the sector leader in PP sector and with a
widespread bancassurance channel, we believe Anadolu Hayat is set
to remain in a solid market position in the coming period. The insurer
may face a slight loss of market share in the medium term, yet
profitability from pension policies in terms of longevity and
commission costs will play a crucial role in Anadolu Hayat’s business
plan.
AvivaSA: AvivaSA demonstrated that it has the potential to bring in a
whole new playing field for the pension business sector in terms of
corporate governance and transparency after the IPO, which took
place in November 2014, by introducing MCEV calculation and IFRS
accounting. AvivaSA is also in a position to diversify itself with the
profitable life and personal accident segments.
ANHYT
AVISA
Anadolu Hayat - (ANHYT.TI / ANHYT.IS)
Current Price TL
5.51TL
Target Price TL (12 Month)
6.85TL
Potential Return TL
24%
Current Mcap (TLmn)
2094
Stock Market Data
Bloomberg/Reuters:
Relative Performance:
ANHYT.TI / ANHYT.IS
1 mth
3 mth
12mth
6%
9%
19%
YTD TL Return:
10%
52 Week Range (TL):
4.16 / 5.83
Av. Daily Vol (US$mn) 3 mth:
0.2
Shares Outstanding (mn):
380
Free Float (%):
17%
For. Ow nership in FF (%):
69%
Avivasa - (AVISA.TI / AVISA.IS)
Current Price TL
45.95TL
60.00TL
Potential Return TL
31%
1,644
Current Mcap (TLmn)
Stock Market Data
Bloomberg/Reuters:
AVISA.TI / AVISA.IS
1 mth
3 mth
Since IPO
-1%
4%
1%
YTD TL Return:
52 Week Range (TL):
5%
42.92 / 52
Av. Daily Vol (US$mn) 3 mth:
0.7
36
Free Float (%):
20%
For. Ow nership in FF (%):
78%
Analyst: Recep Demir
Financials and Ratios*
2014
2015E
2016E
2014
2015E
2016E
GWP (TLmn)
365
416
474
197
251
306
AUM (TLmn)
7,400
9,594
12,408
7,130
9,053
11,512
Net Profit (TLmn)
98
120
151
87
110
139
Analyst: Cem Emre Bilgin
P/BV (x)
3.4
3.1
2.8
4.9
4.2
3.5
+90 (212) 384 1139
P/AUM (x)
0.3
0.2
0.2
0.2
0.2
0.1
[email protected]
+90 (212) 384 1132
[email protected]
P/GWP (x)
5.7
5.0
4.4
8.4
6.6
5.4
P/E (x)
21.4
17.5
13.8
18.9
14.9
11.8
Sales Contact:
ROAE
17%
19%
21%
29%
30%
32%
+90 (212) 384 1155-58
DPS
0.13
0.16
0.20
0.73
1.39
1.75
[email protected]
*Financial ratios are calculated based on IFRS figures for AVISA, TAS for ANHYT; hence, figures may not be comparable on company basis
Please see the last page of this report for important disclosures.
Research: +90 (212) 318 2730
Sales: +90 (212) 318 2741
June 17, 2015
Turkish Private Pension & Life Insurance Sector
RESEARCH
Table of Contents
Investment Case
3
Sector Overview
7
Private Pension
7
Life Insurance
19
Personal Accident
21
Companies
25
Anadolu Hayat
25
AvivaSA
34
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RESEARCH
Investment Case
A fast-growing sector
We believe a CAGR of 20-25% in
the volume of assets under
management is highly achievable
in the PP sector, especially with
the annual rate of inflation at
around 5-7%.
The private pension and life insurance sector in Turkey is
underpenetrated with strong growth potential. Looking at each segment
separately, we believe that there is high growth potential in the Turkish
private pension sector and it is highly likely that the AUM will reach to
TL100bn as of 2018, corresponding to 3.9% of GDP (1Q15: 2.2%). The
main driver of the growth will be the state contribution and increased
penetration among the working population. On the other hand, there are
several prospective arrangements on the table which may both positively
and negatively affect growth in the sector. Two of these are mandatory
participation in the private pension system with an exit option and a
change to the severance payment system. We believe a CAGR of 2025% in the volume of assets under management is highly achievable in
the PP sector, especially with the annual rate of inflation at around 5-7%.
Our figures may appear conservative compared to official and sector
participant forecasts, yet we opt to adopt a conservative approach for the
time being. Another important driver would be the increase in Turkey’s
per capita income, which stands at US$10,971 as of 2013; deeply lower
than OECD average of US$41,493 according to the World Bank figures.
The private pension segment and the life insurance segment
complement each other in terms of growth and profitability. While the
pension segment offers substantial growth potential for the companies, it
is the profitable high margin life segment which currently contributes
positively to bottom lines. Hence, the natural hedging mechanism in the
sector’s P&L is the main reason behind our upbeat call on the private
pension and life sector. On the other hand, strong distribution channels,
especially in the bancassurance segment, will have a decisive impact on
the sector’s profitability. Most life insurance premium production takes
place in terms of protection in credit linked banking activities. Hence, the
main distribution channel for life insurance products is bancassurance.
The bancassurance channel constituted 80% of total gross written
premium (GWP) production during 2014.
Strong growth will support earnings momentum going forward
The pension business has been growing rapidly since its establishment.
In the last 8 years, the AUM has grown at a CAGR of 32%. (between
2006 and 2014) Since 2013, the state contribution has supported growth
in the sector. Even excluding the state contribution of TL1.5bn as of
2014 end, we still find an average annual increase of 31% in the AUM.
We expect the AUM of the sector to reach TRY49.1bn in 2015,
corresponding to a 30% YoY increase while we forecast an average
annual increase of 23% in the sector’s AUM over the next ten-year
period. Despite the solid growth prospects, we expect the sector’s
earnings to be under pressure in 2015 and yet start to improve in the
coming years on the back of the strong expansion in AUM. Recall that
the Treasury had issued a new amendment that placed caps on
“Management Fees” and “Fund Management” at the beginning of 2013;
accordingly, the caps on “Management Fee” income were lowered from
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June 17, 2015
The government’s main motivation
behind supporting the private
pension sector is to improve the
country’s savings ratio, which at
13% and is one of the lowest
among emerging market countries.
RESEARCH
8% to 2%. On the other hand, the maximum “Fund Management” fee
charge could not exceed 3.65% of the total assets under management
prior to 2013. However, with the introduction of the new rules in 2013,
fund management fee charges are differentiated according to the type of
the funds. In that respect, total fund charges will not exceed 1.09% of the
AUM annually for money market funds, 1.91% of the AUM for fixed
income funds or 2.28% of the AUM for growth and equity funds. On top
of the revolutionary changes in 2013, the regulator made further
adjustments to the revenue lines of private pension companies on 25
May 2015. According to the new regulations, legal upper limits for money
market funds, fixed income funds and equity & growth funds remained
unchanged, while some portion of fund managements fees will be
returned to participants in their 6th year in the system and thereafter. On
the entrance fees and management fees front, the sum of the two fee
lines may not exceed 8.5% of the gross monthly minimum wage within
the first 5 years (the gross monthly minimum wage currently stands at
TL1,200 per month). The management fees and entrance fee will not be
charged after the 5th year. Furthermore, the total amount of fees
charged to pensioners may not exceed 60% of the state contribution in
the 6th year, 70% in the 7th year, 80% of the state contribution in the 8th
year, 90% of the state contributions in the 9th year and 100% of the
state contribution in the 10th year and thereafter. The new regulations
will be effective as of Jan 1, 2016. Although it seems that new
regulations put further limits on revenue lines of the private pension
companies, we incorporated the new arrangements to our forecasts and
we believe that the new regulations mainly aim to extend the length of
time the participants stay in the system, while penalizing early exits. We
deem the new regulations to be sector positive in the long run due to the
fact that they attempt to offer an incentive to participants wishing remain
in the system for a longer period of time while deterring early exits. You
may find a detailed analysis of new regulations in this report. (please see
page 10)
Regulatory bodies are dedicated to support the sector
The regulator’s main motivation behind supporting the private pension
sector is to improve the country’s savings ratio, which at 13% and is one
of the lowest among emerging market countries. Our understanding from
sector participants and official reports is that the regulator’s dedication
on improving the savings ratio will continue as the Government believes
that the financing of the current account is a substantial issue in terms of
financial stability. Hence, we find a sharp cut in the state contribution
unlikely in the medium term. On the other hand, the mandatory
participation was successfully applied in the UK and the severance
payment amendments offer strong potential for the sector.
We also believe the rising AUM in the pension fund sector is highly
positive especially for capital markets. In average terms, 16% of the
funds are allocated to growth and actively managed equity funds and the
remaining are allocated to fixed return assets, specifically Turkish
government bonds. While we are expecting an increase in growth funds,
even if these ratios remain stable, our growth assumptions imply an
additional TL45bn of inflows to the equity market and TL225bn to the
fixed asset market by the end of 2024. In our view, these figures will
prove supportive in bringing about a less volatile market and one more
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June 17, 2015
RESEARCH
driven by fundamentals, and continue to be main motivating forces of the
regulators.
Asset Allocation of Pension Mutual Funds
100%
80%
10%
14%
14%
9%
11%
15%
60%
17%
10%
13%
16%
6%
16%
Other
Foreign Securities
Reverse Repo
Stocks
40%
65%
61%
59%
61%
2010
2011
2012
2013
Govt. Bonds & Bills
20%
0%
Source: Pension Monitoring Center
The IPO of the AvivaSA changed the landscape for the sector
AvivaSA demonstrated that it has the potential to usher in a whole new
playing field to the pension sector in terms of corporate governance and
transparency after the IPO by introducing MCEV calculation and IFRS
booking. During our conversations with the management of Anadolu
Hayat, it was stated that the company is also taking steps to provide
IFRS statements which are much more useful in gauging profitability,
while the MCEV (Market Consistent Embedded Value) calculation is
instructive in assessing the profitability evolution of the company. We
have provided a detailed analysis on MCEV in this report. (please see
page 43)
Both AvivaSA and Anadolu Hayat have strong shareholders and
bancassurance channels. While this is supportive of profitability, growth
and corporate governance, it may give rise to some conflicts between
the main shareholder and minority shareholders as far as profitability
management is concerned, as can be easily seen for commission costs.
On a consolidated basis, the economic value of the main
shareholder does not differentiate, but the impact may be seen on the
financials of the subsidiaries. While this risk is low for AvivaSA due to the
joint management with Aviva and Sabancı Group, for Anadolu Hayat the
management may shift its focus on profitability management between
the bank and the subsidiary.
Anadolu Hayat: Our 12 month target price for Anadolu Hayat stands at
TL6.85, indicating 24% upside potential. Anadolu Hayat is a preferential
company in the Turkish private pension & life insurance sector due to its
strong position in the market. The Company is the market leader in
private pension business and ranks number two in life insurance.
Anadolu Hayat comes into prominence with its solid business model,
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June 17, 2015
RESEARCH
high contact ability with customers, wide range of bancassurance
channels, Isbank’s high reputation brand and achievement of economies
of scale.
Anadolu Hayat’s AUM has grown at a CAGR of 32% since the beginning
of 2013, when the regulator pushed through radical changes in the
sector. We forecast a CAGR of 23% in Anadolu Hayat’s AUM between
2014 and 2024, to reach TL59bn.
Anadolu Hayat is the 2nd largest player in the life insurance segment
with a 11% market share as of 2014. We project 12% CAGR in the
Anadolu Hayat’s life insurance GWPs for the next 10 years. Growth
momentum in the life insurance business will continue to back the
Anadolu Hayat’s bottom line.
AvivaSA: We initiate our coverage of AvivaSA with an Outperform
recommendation and a 12 month target price of TL60.00, indicating 31%
upside potential. By taking into account the regulator’s enthusiastic
support for private pensions, AvivaSA’s strong bancassurance network
and the expertise and reputation derived from its main shareholders,
Sabanci Holding and Aviva, we believe AvivaSA presents an exciting
and profitable growth story. The Company’s strong presence in the
corporate pension side supports the AUM in private pensions side, while
profitability will continue to be enforced by achieving economies of scale
going forward.
We believe that AvivaSA will be one of the main beneficiaries of the
process going forward due to its wide bancassurance network, fast
growing agency network and strong presence in the corporate pension
segment; hence, we forecast a CAGR of 23% in the Company’s AUM
between 2014 and 2024.
AvivaSA currently ranks as the number six in the life insurance market.
As the premium production in the life insurance segment is correlated
with consumer loans, it is highly likely that AvivaSA’s market share will
converge with Akbank’s market share in the consumer segment, which
stood at 10.3% as of 1Q15. We forecast a further improvement in
AvivaSA’s market share in the life protection segment from the current
7.2% to 9.5%, and a CAGR of 13% in life protection technical profit.
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June 17, 2015
Turkish Private Pension & Life Sector
RESEARCH
SECTOR OVERVIEW
Given the sector’s high strategic
importance for the Government,
low
penetration
levels
and
Turkey’s demographic conditions,
the sector offers strong growth
potential in the coming years.
Private Pensions
The private pension system was established in October 2003 in Turkey
following the introduction of the Individual Pension System, which was
enacted in 2001. The system was designed as a supplementary Pillar 3
system with the Pension Law and is regulated by the Undersecretariat of
the Treasury and the Capital Markets Board. The volume of Assets Under
Management (AUM) has grown substantially between 2006 and 1Q15,
posting a CAGR of 38%. Accordingly, the sector’s AUM reached TL40bn
by the end of 1Q15, accounting for 2.2% of GDP. The number of
participants also grew five-fold from 1.1mn to 5.4mn between 2006 and
1Q15. The regulator has undertaken massive efforts to improve and
expand the system to increase low savings rate of the country. Given the
sector’s high strategic importance for Government, low penetration levels
and Turkey’s demographics (share of working age individuals in total
population is 68% according to Turkstat data), we believe the sector offers
strong growth potential in the coming years. Participation in the system is
voluntary and it is a defined contribution plan. Citizens above the age of
17 are able to participate in the system. Participants may retire if they are
56 and over and if they have completed a minimum 10 years of
contributions.
AUM and AUM/GDP ratio
(2014-2024E): 23%CAGR
(2006-2014): 37%CAGR
8%
15
6%
12
4%
(2014-2024E): 10% CAGR
(2006-2014): 17% CAGR
9
6
0%
AUM (bn TL) - LHS
AUM/GDP
3
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
350
300
250
200
150
100
50
0
# of participants (mn)
# Participants (mn)
Source: Pension Monitoring Center, Garanti Securities Estimates
The individual pension system has also been continuously growing and
generating funds since its establishment. However, the state’s incentive of
a 25% contribution, which has been in place since January 2013, marks a
significant milestone in respect to the growth of individual pension funds.
On the back of the new regulations in 2012 end, the number of
participants has grown at a CAGR of 27% and had reached nearly 5.4
million by the end of 1Q15. The total amount of contributions paid by the
participants, along with state contributions, had reached TL31bn with the
accumulated fund amounting TL40bn as of the end of 1Q15, indicating a
CAGR of 35% in the AUM of the individual pension system following the
introduction of the new regulations, exceeding the CAGR of 30% between
2010 and 2012.
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June 17, 2015
AUM has grown substantially
between 2006 and 2014 with a
CAGR of 38%. Accordingly,
sector’s AUM reached to TL40bn
by the end of 1Q15, 2.2% of 2014
GDP.
RESEARCH
The private pension sector has been growing rapidly; in addition to a 34%
increase in the number of contracts in 2013, the volumes of accumulated
funds and total contributions also increased by 30% and 42%,
respectively.
An analysis of the distribution of participants according to contract type
finds that approximately 73% of the participants were on individual
pension contracts and 27% were on group contracts as of the end of
2013.
According to table below, which presents the portfolio movements of
pension companies, new contracts accounted for 97% of the increase in
the number of contracts. The new contracts provided a 31% contribution
to the total accumulation in the system.
# of
Contracts
Contributions
(‘000 TL)
Government
Contribution
(‘000 TL)
Beginning of the period
3,508,276
19,585,623
34,476
Increase
1,641,595
8,664,173
1,148,715
-
5,204,975
798,350
1,597,181
2,735,922
304,597
Transfers
36,667
621,007
41,653
Change in portfolio
7,747
102,269
4,115
466,568
3,126,573
36,480
Before Retired
395,009
2,244,367
27,193
Transfers
37,083
596,738
5,053
Death and Disability
2,230
29,451
264
Retired
2,115
136,544
985
Other
30,131
119,474
2,985
4,683,303
25,123,223
1,146,712
2013
Cont. from previous year
New contracts
Decrease
End of the Period
Source: Treasury
The following graph presents the average accumulation per participant
and contract. As can be seen from the graph, the average accumulated
fund volume had reached TL6,325 per participant and TL5,609 per
contract as of the end of 2013.
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June 17, 2015
RESEARCH
According to the monthly payment
amount
distribution,
the
contribution amounted between
TL101 and TL200 is preferred
mostly by the participants in 2013.
Total accumulation per participant and per contract
7,000
6,000
4,590
5,000
3,667
4,141
3,158
4,000
2,641
1,812
3,000
2,000
5,419
6,499
4,872
5,803
5,260
4,734
6,325
5,609
3,312
2,877
2,347
1,680
1,000
-
2005
2006
2007
2008
2009
2010
Accumulation per participant
2011
2012
2013
Accumulation per contract
Source: Treasury
As for the age groups of the participants in the individual pension system,
the 25-34 and 35-44 ages groups were dominant in the overall make-up.
The 25-44 age group accounted for nearly 71% of the contracts in force in
2013.
Distribution of contracts according to age groups
Age
2009
2010
2011
2012
2013
% in 2013
Under 25
139,866
278,656
305,226
394,880
503,220
10.75%
25-34
844,303
1,061,085
1,213,980
1,449,551
1,851,578
39.53%
35-44
746,710
779,167
910,462
1,069,013
1,450,759
30.98%
45-54
382,161
343,700
413,507
473,716
692,670
14.79%
Over 55
90,451
72,185
95,158
106,305
185,076
3.95%
Total
2,203,491
2,534,793
2,938,333
3,493,465
4,683,303
100%
Source: Treasury
According to the payment amount distribution, participants generally
preferred contributions of between TL101 and TL200, with 61% of
participants paying their contributions on a monthly basis in 2013.
Distribution of contracts according to contribution amount (TL)
Monthly
Below TL100
TL100 - TL200
Over TL201
Total
2009
2010
2011
2012
2013
% in 2013
791,794
812,280
755,932
766,560
841,362
17.96%
1,151,046
1,369,011
1,727,922
2,137,906
2,875,933
61.42%
260,651
353,502
454,479
588,999
966,008
20.62%
2,203,491
2,534,793
2,938,333
3,493,465
4,683,303
100%
Source: Treasury
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June 17, 2015
Regulatory Changes in 2013:
- Direct state contribution
- Tax regulations
- Caps on fees
RESEARCH
Regulatory Changes in 2013 and 2015
Given the low savings rate in Turkey, which is 13.4% as of 2014 (OECD
average: 21.9%) and still high current account deficit (5.7% of GDP in
2014), raising the savings rate is of strategic significance for the
Government. Regulatory bodies see the private pension system as one of
the major tools in boosting the savings rate and pushed through a number
of far-reaching changes in the private pension system at the beginning of
2013. The changes in the private pension system are listed below:



State contribution: According to the new law, the Government
started to make direct contributions in addition to the contributions
paid by the individuals. The direct state contribution amounts to
25% of the contributions made by individuals with a cap of the 25%
of the annual gross minimum wage (TL3,711 per year). The
entitlement to receive state contributions depends on the exit year.
Accordingly, a participant is entitled to receive 15% of the state
contribution at the end of 3 years, 35% of the contribution at the
end of 6 years and 60% of the contribution at the end of 10 years.
Participants will be entitled to withdraw the full state contribution if
they are over 56 years of age and fulfill the minimum 10 year
contribution requirement. Moreover, all state contributions are
accumulated in separate funds, which are invested in only
Government bonds.
Taxation: Under the current legislation, only investment income
account is taxed. (Tax rates are as follows; for participants retired at
age of 56 and above with minimum 10 years of contributions is 5%,
participants leave the system before age of 56 with minimum 10
years of contributions or leave the system at age of 56 and above
and making less than 10 years of contribution is 10%, and
participants who don’t meet any of these requirements is 15%)
Before 2013; 25% of retirement payments were exempt from tax,
residual amount was subject to 5% tax and early surrenders were
subject to withholding tax between 10% and 15% regarding their
exit year.
Reductions in the caps on “Management Fee” and “Fund
Management Fee”: The caps on “Management Fee” income were
lowered to 2% from 8% at the beginning of 2013. On the other
hand, before 2013 the maximum “Fund Management” fee charge
could not exceed 3.65% of the total asset under management.
According to the arrangements made in 2013, fund management
fee charges differentiated according to the type of the funds. In that
respect, total fund charges will not exceed 1.09% of the AUM
annually for money market funds; 1.91% for fixed income funds,
and 2.28% for growth funds and equity funds.
The regulator has introduced new caps and restriction on these revenue
lines of pension companies on 25 May 2015. We believe the new
regulations mainly aim to extend the length of time the participants stay in
the system, while penalizing early exits. We deem the new regulations to
be sector positive in the long run due to the fact that they attempt to offer
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June 17, 2015
Prospective arrangements:
RESEARCH
-Severance payments
an incentive to participants wishing remain in the system for a longer
period of time while deterring early exits. Longer term participation means
higher profitability and stable growth for the sector. New arrangements on
caps on revenue lines are as follows:
-Reduction in fee levels

No change in the caps on fund management fees for the first 5
years. The legal upper limit is 1.09% for money market funds,
1.91% for fixed income funds and 2.28% for equity & growth funds.
Following the 6th year, 2.5% of the fund management fees will be
returned to the participants and this ratio will increase by 2.5pp
each year until the 15th year. 25% of the fund management fees
will be returned to the participants each year in the 15th year and
thereafter. Rebates will be effective for the fund management fees
which will have been charged since 2013. 1.1% of the AUM will be
exempt from fund management fee rebates.

The sector’s net Fund Management Fee/AUM ratio currently
stands at 1.42%, compared to 2.20% in 2012. There will be
reductions in the fund management fee from 2018. Reductions will
be reflected gradually and the maximum reduction on the fund
management fee per agreement will reach 36bps in the long run.
We believe the impact of the new arrangements will start to have an
impact on the financial statements of private pension companies in
2018 and thereafter. However, as private pension companies
currently charge fund management fees which are lower than the
legal upper limit, the impact of the new measures will be limited. It
appears that the main target of the new regulations is to keep
participants in the system for longer periods. Taking the prospective
new participants into the system, the cut in net fund management
fees would be around 15-20bps.

Entrance fee and management fees are aggregated under a
new income statement line. Previously, the cap on management
fees stood at 2% and entrance fee rates varied between 0% and
75% of the gross monthly minimum wage, depending on the exit
year. Under the new arrangements, the sum of the two fee lines
may not exceed 8.5% of the gross monthly minimum wage within
the first 5 years (the gross monthly minimum wage currently stands
at TL1,200 per month). The management fees and entrance fee will
not be charged after the 5th year.

The total amount of fees charged to pensioners may not
exceed 60% of the state contribution in the 6th year, 70% in the
7th year, 80% of the state contribution in the 8th year, 90% of
the state contributions in the 9th year and 100% of the state
contribution in the 10th year and thereafter. These limits will not
be applied to individuals whose assets under management exceed
ten times the gross annual minimum wage. The Undersecretariat of
the Treasury is entitled to change the fund management fee rebate
rate and lump sum payments concerning the management fee and
entry fee by as much as 50%.
-Mandatory participation
On the flipside, we believe if the
mandatory participation proves a
success in Turkey, the 25% state
contribution may well be lowered
in the medium term, given that it
had a burden of around TL1.8bn
on the state budget in 2014.
We believe the new regulations regarding entrance and management fees
will put pressure on the bottom lines of the private pension companies in
11
June 17, 2015
We believe the new regulations
regarding
entrance
and
management
fees
will
put
pressure on the bottom lines of
the private pension companies in
the
short
run,
whereas
simplification of the fee structure
and participant friendly new
scheme
will
attract
more
individuals.
RESEARCH
the short run, whereas simplification of the fee structure and participant
friendly new scheme will attract more individuals. Also rebates from the
fund management fees, the main revenue line of the sector, will be
effective in 2021 and onwards. Total effect of the rebates will be 20-30 bps
cut in the fund management fees, considering new comers to the system.
The sector participants had already been expecting and pricing in such a
cut; hence, the valuation impact of the new regulations on fund
management fee will be limited.
Up to 2012
Main Fees
Framework
* Private pension system launched as
voluntary, fully funded and defined
contribution plans
* Retirement age at 56
* Funds are managed by seperate
asset management companies
From January 2013
New regulations
* New regulations to spur participation and
persistency: State contribution and low er
fee caps
* New draft regulations proposed in April
'14 and has been under industry
consultation since
* Limits on management fees and
entrance fee to incentivize
participants to remain in the
system longer
Entry
Max limit is ½ gross monthly min. w age
Max limit is 0% to 75% of gross monthly
min.w age depending on exit years
Mgmt
Max 8% contributions
Max 2%
Fund
Mgmt
Incentives
Max: 3.65% annual NAV
* Tax incentives
*Under the new arrangements, the
sum of the tw o fee lines may not
exceed 8.5% of the gross monthly
minimum w age w ithin the first 5
years
*Follow ing the 6th year, 2.5% of
the fund management fees w ill be
Max: 1.09% annual for money market /
returned to the participants and
1.91% for fixed income / 2.28% for equity
this ratio w ill increase by 2.5pp up
to 25%.
* 25% matching contribution from the
Government (subject to vesting period)
* Tax charged based on vesting period
* State contribution confirmed to
continue
Source: AvivaSA, Garanti Securities
Based on our discussions with
insurers and some reports in the
press, there are plans to bring in
mandatory participation in the
private pension system with an
exit option for all new employees.
There are several prospective arrangements on the table which may both
positively affect the growth in the sector. These changes include i)
mandatory participation in the private pension system with an exit option,
ii) changes in the severance payment system.

Mandatory participation: Based on our discussions with insurers
and some reports in the press, there are plans to bring in mandatory
participation in the private pension system with an exit option for all
new employees. Regulatory bodies believe that a mandatory
contribution for those newly entering the workforce could be very
positive for the growth prospects, having been successfully applied
in the UK. This amendment targets the expansion of the system’s
scope and would have a positive impact on our valuation. Moreover,
the Treasury started to conduct a pilot study where 6 private
12
June 17, 2015
RESEARCH
In the upcoming periods, we
believe the debate on severance
payments will intensify as the
Government is dedicated to
carrying out structural labor
reforms as announced previously
with the aim of increasing the
utilization of severance payments
among employees.
pension companies are working with several corporations.
Meanwhile, sector participants believe the exit ratios are low in
mandatory participation system in the peer countries as contributors
refrain from paper work and the entrance contributions are
negligible as a proportion of the monthly salary. On the flipside, we
believe if the mandatory participation proves a success in Turkey,
the 25% state contribution may well be lowered in the medium term,
given that it will have a burden of around TL2.4bn on the state
budget in 2015.

Severance payments: The regulator prepared a draft law which
requires employers to deposit employees’ severance liabilities to a
fund established by private pension companies. Accordingly, the
current non-cash structure of the system would be transformed to a
cash basis. However, negotiations with the labor unions as well as
employers are still ongoing and we do not expect a material change
in the current severance payment system during 2015. In the
upcoming periods in June, we believe the debate on severance
payments will intensify, as the regulator is dedicated to carrying out
structural labor reforms as announced previously with the aim of
increasing the utilization of severance payments among employees.
In the current application, only 10% of the employees are entitled to
receive severance payments and these employees are generally
working in state and state-linked companies. On the other hand, the
regulator is also aiming to increase the flexibility in working life and
alleviate the rigidity of the system by introducing a cash-based
severance system. While the labour unions are opposing to the new
scheme, we believe the changes will be subject to negotiations and
both sides will be able to find common ground. According to recent
reports in the media and based on our discussions with the
managements of private pension companies, the Ministry of Labour
and Social Security has offered to restructure the payments of
severance packages whereby the state will provide a 25%
contribution to the financing of severance payments. The Ministry’s
restructuring of the severance pay system aims to introduce a
formula based on the needs of both workers and employers. The
Ministry’s draft model reportedly calculates the remuneration of
severance payments on the equivalent of between 11 and 22
working days, but workers’ unions are pushing for a figure of 30
days. According to the new formula, severance pay will be the
equivalent of 30 days, with 25% of the payment to be financed by
the Government, easing the burden on employers. Furthermore,
unemployment fund cuts will have a portion of funds allocated to
severance payment funds, enabling contributions made by workers
and employers in the current system to be shifted to the severance
pay. The new system will see an 8.3% cut in gross salaries in light
of new 30-day severance pay packages, implying no labor right
loss. A 25% share of the severance pay (2 points) will be financed
by the state, with 2 points to be financed by the unemployment
insurance fund and 4 points to be serviced by employers as a
severance premium.
13
June 17, 2015
RESEARCH
In terms of AUM/GDP ratios;
Turkey is lagging behind from its
peers. Turkey’s AUM/GDP ratio
increased from 0.37% in 2006 to
2.2% in 2014. However; average
AUM/GDP ratio of non-OECD
countries stands at 38% according
to the most recent data.
Turkish private pension sector is premature compared to its peers
The Turkish private pension sector exhibited a strong rate of growth since
2006, with a CAGR of 38% between 2006 and 2014. Despite the rapid
expansion in recent years, we still find the sector deeply underpenetrated,
given the young population and favorable demographics. According to
Turkstat data, Turkey has a total workforce of 25mn and working age
population of 52mn. Participation in the work force is increasing steadily
due to an increasing labour participation rate, the number of new
graduates and rising recognition of the system. Additionally, the regulator’s
enthusiasm and attractive incentives will continue to promote the system.
According to the latest data, total participation to the private pension
system stands at 5.4mn.
In terms of AUM/GDP ratios, Turkey is lagging behind its peers. Turkey’s
AUM/GDP ratio increased from 0.37% in 2006 to 1.7% in 2013. However;
the weighted average of AUM/GDP ratios in non-OECD countries stood at
38%, while that of OECD countries realized at 84% according to the most
recent OECD data. We think that there is significant potential for growth in
the Turkish private pension sector. We project that the sector’s AUM will
grow from TL37.8bn in 2014 to TL310bn in 2024, indicating a CAGR of
23%. Accordingly, the sector’s AUM/GDP ratio is expected to stand at
6.9% by the end of 2024.
Following the introduction of new regulations, the number of participants
increased by 2.3mn since the January 2013, indicating CAGR of 35% and
reached nearly to 5.4 million by the 1Q15 end, (growth in number of
participants between 2009 end and 2012 end was 16% CAGR). AUM rose
by TL19.7bn after the regulation. The accumulated fund rose to TL41bn as
of 1Q15-end. This figure shows that AUM in the individual pension system
increased by CAGR of 35% following the new regulations, while growth
figure between 2009 end and 2012 end was 31%.
AUM/GDP ratios in Selected Countries (2013)
87%
OECD Weighted Average: 84%
56%
8%
7%
6%
4%
4%
2%
2%
2%
1%
Korea
Thailand
Hungary
Slovenia
Romania
Turkey
Indon.
Latvia
9%
Bulgaria
10% 10%
Estonia
13%
Slovak
Republic
15%
Brazil
19%
18%
Colombia
19%
Poland
19%
Croatia
Uruguay
Bolivia
Hong
Kong
Ireland
Chile
S. Africa
19%
Peru
28%
Nigeria
Non- OECD Weighted Average: 38%
38%
Mexico
62%
Source: OECD
14
June 17, 2015
There are 3 main sources of
income: management fees, fund
management fees and entrance
fees.
RESEARCH
Fee Structure
Entrance Fee: There are three main sources of income; management
fees, fund management fees and entrance fees. Entrance fees are levied
once when a participant enters the system. According to the regulations
dated back in January 2013; entrance fee amounts had varied among
75%, 50% and 25% of gross minimum monthly wage for participants
leaving the system in 0-3 years, 3-6 years and 6-10 years, respectively.
Entrance fee for the participants who stay in the system for 10 years and
onwards had been 0%. A new scheme for entrance and management fees
has been established on 25 May 2015 in order to simplify the system for
participants and entice them to stay in the system longer. Accordingly,
entrance fee and management fees have been aggregated under one
line, and sum of the two fees may not exceed 8.5% of the gross monthly
minimum wage within the first 5 years (the gross monthly minimum wage
currently stands at TL1,200 per month). The management fees and
entrance fee will not be charged after the 5th year. The new scheme will
be effective as of 1 January 2015.
Revenue Breakdown
100%
80%
60%
3%
2%
2%
1%
1%
1%
2%
2%
4%
24%
26%
26%
26%
20%
18%
19%
22%
21%
24%
24%
22%
13%
13%
55%
57%
58%
62%
62%
2010
2011
2012
2013
2014
32%
38%
30%
26%
40%
20%
35%
39%
41%
2006
2007
2008
47%
0%
Other Fees
Entrance Fee
2009
Management Fee
Fund Management Fee
Source: Pension Monitoring Center, Insurance Association of Turkey
Premium Holiday Charge: Holiday charges are levied when a participant
makes irregular payments. According to the regulations in January 2015,
private pension companies was able to charge TL2 for each unpaid
month. Following the new regulations on 25 May 2015, premium holiday
charge has been removed, however, companies are able to levy holiday
charge as unused management fee.
Management Fees: Management fees are charged on regular
contributions. State contributions are exempt from the management fee.
The maximum management fee commission rate was cut from 8% to 2%
in 2013. On the back of regulations dating back on 25 May 2015, entrance
fee and management fees are aggregated under a new income statement
line. According to the new arrangements, the sum of the two fee lines may
not exceed 8.5% of the gross monthly minimum wage within the first 5
years. (around TL100 per year).
15
June 17, 2015
Fund management fees are
charged on net asset value of
each fund and legal upper limit
was decreased from 3.65% to
1.09%, 1.91% and 2.28% for
money market funds, fixed income
funds and equity & growth funds in
2013, respectively.
RESEARCH
The management fees and entrance fee will not be charged after the 5 th
year. The 5 year count will start from the contract establishment date and
new regulations will be effective as of January 2016. We expect the
impact of the new regulations on private pension companies’
management fee line will be negative in 2016; however, we expect the
impact of new regulations on P&L of private pension companies will be
manageable thereafter.
Management Fee Evolution
New regulations
160
5.5%
128
4.4%
96
3.3%
64
2.2%
32
1.1%
0
0.0%
2006
2007
2008
2009
Management Fee (TL mn)
2010
2011
2012
2013
2014
Management Fee / Contribution (rhs)
Fund management fees: Fund management fees are charged on the net
asset value of each fund. No change in the caps on fund management
fees for the first 5 years. The legal upper limit is 1.09% for money market
funds, 1.91% for fixed income funds and 2.28% for equity & growth funds.
Following the 6th year, 2.5% of the fund management fees will be
returned to the participants and this ratio will increase by 2.5pp each year
until the 15th year. 25% of the fund management fees will be returned to
the participants each year in the 15th year and thereafter. Rebates will be
effective for the fund management fees which will have been charged
since 2013. 1.1% of the AUM will be exempt from fund management fee
rebates. Please note that, the sector’s net Fund Management Fee/AUM
ratio currently stands at 1.42%, compared to 2.20% in 2012. There will be
reductions in the fund management fee from 2018. Reductions will be
reflected gradually and the maximum reduction on the fund management
fee per agreement will reach 36bps in the long run. We believe the impact
of the new arrangements will start to have an impact on the financial
statements of private pension companies in 2018 and thereafter.
However, as private pension companies currently charge fund
management fees which are lower than the legal upper limit, the impact of
the new measures will be limited. It appears that the main target of the
new regulations is to keep participants in the system for longer periods.
Taking the prospective new participants into the system, the cut in net
fund management fees would be around 15-20bps.
16
June 17, 2015
Fund Management Fee Evolution
New regulations
630
2.5%
540
2.1%
450
360
1.7%
270
1.3%
180
0.9%
90
0
0.5%
2006
2007
2008
2009
2010
Fund Management Fee (TL mn)
2011
2012
2013
2014
Fund Management Fee / AUM (rhs)
Pension Business Structure
19 companies operate in Turkish private pension sector. The barriers to
entry to the market are not high; however, success in the sector relies on
having a widespread network and companies affiliated with large banks
command a competitive advantage. The key players affiliated to large
banks are Garanti Emeklilik (Garanti Bank, GARAN.IS), Anadolu Hayat
(Isbank, ISCTR.IS), Allianz Yasam Emeklilik (Yapi Kredi, YKBNK.IS),
AvivaSA (Akbank, AKBNK.IS) and Vakif Emeklilik (Vakifbank, VAKBN.IS).
The top 5 players have a combined market share of 66% in terms of
participants and 76% in terms of AUM as of 1Q15.
Market Shares in Terms of AUM and # of Participants (Mar 2015)
AUM Market Share
25%
20%
15%
# of Participants market share
20% 19%
17%
17%
16%
14%
15%
12%
10%
7%
5%
5%
6% 5% 5% 3%
3%3% 2%
2%
2%1%
Groupama
Halk Hayat
BNP Paribas
Allianz Hayat
ING Emeklilik
Vakıf Emeklilik
Allianz Yaşam
Garanti
Emeklilik
Avivasa
0%
Anadolu Hayat
New entrants such as Ziraat Hayat
Emeklilik and Halk Hayat ve
Emeklilik have gained market
share from top 5 players since the
end of 2012.
RESEARCH
Although these top 5 companies have been dominating the market for
years, new entrants to the market since the end of 2012 have captured
5pp market share from these players in terms of AUM. In 2012, the 5 big
players had a combined market share of 74% in terms of the number of
participants (1Q15: 66%) and an 81% share in terms of the AUM (1Q15:
76%). New entrants such as Ziraat Hayat Emeklilik and Halk Hayat ve
Emeklilik have captured 1pp and 3pp market shares from the top 5
17
June 17, 2015
RESEARCH
The market share of Anadolu
Hayat is likely to converge to
Isbank’s market share, while
AvivaSA’s market share is set to
approach Akbank’s market share
in the long run.
players since the end of 2012, respectively. In particular, Ziraat Emeklilik
and Halk Hayat, which have strong bancassurance channels, have
aggressive growth targets; this could pose risks for the current big players
in the sector going forward. A total of 2.2mn new participants have joined
the system since the enactment of the new regulations on 1 January
2013, and the AUM has increased by TL17.3bn in the same period. The
aforementioned 5 big players had a 54% share of the new participants
added to the system since the end of 2012 and a 71% share of the AUM.
We forecast that the market shares of each player will approach the
market shares of their affiliated distribution channels. The market share of
Anadolu Hayat is likely to converge to Isbank’s market share, while
AvivaSA’s market share is set to approach Akbank’s market share in the
long run.
M. Shares in new entrants, who entered the system after Jan 2013
# of Participants Market Share
18%
20%
16%
12%
12%
AUM Market Share
17%
12%
16%
14%
12%
12%
8%
8%
4%
4%
11%
11%
8%
5%
3%
3%
4%
4%
3%
3%
2%
3%
Asya Emeklilik
BNP Paribas
Allianz Hayat
Ziraat Hayat
ING Emeklilik
Halk Hayat
Vakıf Emeklilik
Allianz Yaşam
Garanti
Emeklilik
Anadolu Hayat
Avivasa
0%
Market Share (# of part.)
Aegon Emeklilik
Allianz Hayat
2013
2014
1Q15
1%
2%
1%
2%
1%
2%
Allianz Yaşam
11%
11%
Anadolu Hayat
18%
17%
Asya Emeklilik
4%
4%
Avivasa
15%
Axa Hayat
2013
2014
1Q15
12%
Market Share (AUM)
Aegon Emeklilik
Allianz Hayat
Allianz Yaşam
1%
3%
16%
0%
3%
15%
0%
3%
15%
17%
Anadolu Hayat
20%
20%
19%
4%
Asya Emeklilik
1%
1%
1%
14%
14%
0%
0%
0%
Avivasa
Axa Hayat
19%
0%
19%
0%
19%
0%
BNP Paribas
3%
3%
3%
BNP Paribas
3%
3%
3%
Cigna Finans
2%
2%
2%
Cigna Finans
1%
1%
1%
Ergo
1%
1%
1%
Fiba Emeklilik
0%
0%
0%
Ergo
Fiba Emeklilik
1%
0%
0%
0%
0%
0%
Garanti Emeklilik
18%
17%
17%
Garanti Emeklilik
16%
16%
16%
Groupama
2%
2%
1%
Groupama
3%
2%
2%
Halk Hayat
3%
5%
5%
ING Emeklilik
6%
5%
5%
Halk Hayat
ING Emeklilik
1%
5%
2%
5%
3%
4%
Katılım Emeklilik
0%
0%
1%
Katılım Emeklilik
0%
0%
0%
Metlife
3%
3%
3%
Metlife
1%
2%
2%
Vakıf Emeklilik
7%
6%
6%
Ziraat Hayat
Other
3%
0%
5%
0%
5%
0%
Vakıf Emeklilik
Ziraat Hayat
Other
6%
2%
0%
7%
2%
0%
7%
2%
0%
18
June 17, 2015
RESEARCH
Most life insurance premium
production takes place in term
protection in credit linked banking
activities. Hence, main distribution
channel for life insurance products
is bancassurance.
Life Insurance
Life insurance is an agreement between an insured and insurer, where
the insurer pays the beneficiary a sum of money in return for premiums
paid by insured. If the insured passes away, the named beneficiary
receives the proceeds and is thereby safeguarded from the financial
impact of the death of the insured. The Turkish life insurance sector is
highly underpenetrated compared to its peers. Gross written premiums
(GWP) as a ratio of GDP is a common measure to assess the level of
penetration in the life insurance sector. The average GWP/GDP ratio
stands at 3.4% in the EU-27, 1.7% in the Czech Republic, 1.6% in Poland
and 1.4% in Hungary; in Turkey, the GWP/GDP ratio stood at just 0.2% at
the end of 2014. There is a high correlation between the growth in GWP
and loan growth. We are more cautious in life insurance segment
compared to private pensions. We expect a CAGR of 12%, between 2014
and 2024, slightly lower than the CBRT’s current target of 15% (FX
adjusted) loan growth; accordingly, we project an increase in the GWP/
GDP ratio from 0.19% at the end of 2014 to 0.23% by the end of 2024. As
the Turkish life insurance sector is highly underpenetrated compared to its
peers, and given that there is enough room for the Turkish banking sector
to grow given low levels of household debt and low banking assets to
GDP ratios, we believe the life insurance sector offers growth potential.
Most life insurance premium production takes place in term protection in
credit linked banking activities. Hence, bancassurance is the main
distribution channel for life insurance products. The bancassurance
channel accounted for 80% of total GWP production in 2014. However, it
should be noted that endowment and life savings products have become
less popular in recent years given the high popularity of pensions. Life
insurance was the second-largest segment of the Turkish insurance
industry in 2014, accounting for 19% of the industry’s total gross written
premiums. By the end of 1Q15, there were 26 insurers operating in the
highly competitive segment, in which both domestic and foreign insurers
compete for market share. Although the Government’s amendment of the
private pension law is also expected to supplement the growth of the life
segment, the Turkish life insurance segment is expected to consolidate
over the forecast period on the back of increasing competition, the
depreciation of the currency bringing in foreign participation and changes
to the regulations to align the sector with Solvency II criteria.
Market Shares in Life Insurance as of 2014 end
18%
15%
10%
Sector - GWP (TL mn) - LHS
Source: PMC, IAT
2024E
2023E
2022E
0.00%
2021E
0
2020E
0.05%
2019E
2000
2018E
BNP
Paribas
Vakıf
Emeklilik
Metlife
0.10%
4000
2017E
4%
2016E
5%
2014
5%
2015E
6%
Cigna
Finans
AvivaSA
Halk
Hayat
Garanti
Emeklilik
0.15%
2013
6%
0%
Allianz
Yaşam
0.20%
6000
5%
Anadolu
Hayat
10000
8000
7%
Ziraat
Hayat
0.25%
2012
11% 10%
10%
12000
2011
20%
GWP Production and GWP/GDP ratio
GWP / GDP - RHS
19
June 17, 2015
65% of the products supplied to
the customers are credit linked
and the slowdown on the retail
lending and measures taken on
the Consumer Protection Law led
to slower premium generation in
2014.
RESEARCH
GWP 2014
(TL mn)
GWP
2013
(TL mn)
Change
%
Market
Share
2014
Market
Share
2013
M. Share
Change
(pp)
Ziraat Emeklilik
606
796
-24%
18.5%
23.4%
-5.0
Anadolu Hayat
365
394
-7%
11.1%
11.6%
-0.5
Allianz Yaşam
331
240
38%
10.1%
7.1%
3.0
Garanti Emeklilik
319
298
7%
9.7%
8.8%
0.9
Halk Hayat
237
280
-15%
7.2%
8.2%
-1.0
AvivaSA
213
201
6%
6.5%
5.9%
0.6
Cigna Finans
188
199
-5%
5.7%
5.9%
-0.1
Metlife
180
171
6%
5.5%
5.0%
0.5
Vakıf Emeklilik
154
202
-24%
4.7%
6.0%
-1.2
BNP Paribas
134
75
80%
4.1%
2.2%
1.9
Others
553
540
2%
16.9%
15.9%
0.9
3,280
3,395
-3.4%
100%
100%
-
Company
Total
Source: IAT
In the life insurance market, after a strong growth spurt between 2009 and
2013, GWP generation slowed down in 2013 mainly due to the measures
taken on retail lending in the banking sector. Around 65% of the products
supplied to customers are credit linked and the slowdown in retail lending
and measures taken on the Consumer Protection Law led to slower
premium generation in 2014.
The life market continued to be dominated by companies with bancaassurance distribution. State companies had a 30.4% market share in 2014 - a
7.2pp decline YoY, mainly due to the state banks’ switch in focus from
retail lending to commercial loans in 2014. Foreign companies were highly
competitive in this segment in 2014, with BNP and Aegon gaining 1.9pp
and 1.5pp of market share respectively in 2014. The market share of
other companies remained similar to the previous year in 2014 with small
changes.
Emerging Markets Life Insurance GWPs as of GDPs
Life Insurance Distribution Channels
4%
100%
3%
80%
2%
EM Average: 1.41%
2%
1%
1%
1%
75%
77%
81%
80%
10%
13%
9%
10%
8%
10%
10%
2011
2012
2013
2014
40%
1%
20%
Thailand
Malaysia
India
Chile
Brazil
Poland
PR China
Indonesia
Philippi…
Colombia
Mexico
Bulgaria
Hungary
Peru
Argentina
Pakistan
Russia
Turkey
Ukraine
Romania
Venezu…
0%
60%
1%
Source: Swiss Re
14%
0%
Other
Broker
Bancassurance
Agency
Direct
Source: IAT
20
June 17, 2015
Although
non-life
insurers
dominate the market with an 77%
market share as of 2014 end, life
insurers have been gaining market
share since 2011.
RESEARCH
Personal Accident
Personal accident insurance is an annual policy which provides
compensation in the event of injury, disability or death caused solely by
violent, accidental external and visible events. Personal accident
insurance covers the following situations, although the availability of the
products depends on each company:
-Accidental death
-Disability
-Accidental medical reimbursement
-Bus seats mandatory personal accident insurance
-Hospital cash
-Passenger accident insurance
-Common carrier
Personal accident products are mainly cross-sold at branches. Success
mainly depends on brand recognition, product innovation, pricing,
coverage and cross selling capabilities. The most important sales channel
is bancassurance, which constitutes 49% of total sales. The
bancassurance channel is followed by agencies (41%), direct channels
(6%) and brokers (4%).
Players in the personal accident segment are divided into two categories;
non-life insurers such as Euroko, Allianz, Chartis, Anadolu Sigorta and Ak
Sigorta and life insurers such as Metlife, AvivaSA, Groupama, Vakif
Emeklilik and Ziraat Emeklilik. Although non-life insurers dominate the
market with a 77% market share as of the end of 2014, life insurers have
been gaining market share since 2011. The market share of life
underwriters stood at 17% as of the end of 2011; however, they
constituted 23% of the total market at the end of 2014.
Personal Accident Distribution Channels (2014)
4% 0%
Market Shares in Personal Accident Segment (2014)
2011
6%
Direct
2014
17%
Agencies
23%
77%
83%
Bancassura
nce
Broker
49%
41%
Other
Non Life Insurers
Life Insurers
Source: PMC, IAT
Non Life Insurers
Life Insurers
Source: PMC, IAT
21
June 17, 2015
We have incorporated a mere 2030bps reduction in fee fund
management fees in our valuation;
however, a substantial reduction
in the cap on fund management
fees would pose a risk to our
valuation.
We expect the market shares of
bank affiliated pension companies
to converge with the market
shares of the banks they are
affiliated to in the long term, such
that the market shares of AvivaSA
and
Anadolu
Hayat
would
approach those of Akbank and
Isbank, respectively.
RESEARCH
Risks
Regulatory risk
Private pension and life insurance sector is highly dependent on
regulatory changes. 3 major legislative regulations have shaped the
sector’s fundamentals since the beginning of the industry; introduction of
the individual pension system in 2003, regulations on fees and caps in
January 2013 and further adjustments regarding fees and caps in May
2015. Although the sector is strategically important for the regulator, high
dependency on legal changes poses both upside and downside risks for
the industry. The Government may consider to put pressure on private
pension companies’ profitability in favor of existing and prospective
participants. We believe that the high dependency of the revenue lines on
regulatory changes makes private pension and life insurance companies
susceptible to further adjustments. In addition to the prospective
regulations regarding caps and fees, which would negatively effect the
profitability of private pension companies; introduction of the auto
enrollment system and legislative regulations on severance payments
would be positive for the sector.
Another risk element for the sector is the potential introduction of a
performance based fee. In order to entice asset managers to outperform
their benchmarks, the government is planning to introduce performance
based fees. Although a new kind of revenue would be considered positive
for the sector; the introduction of performance based fees may put
pressure on margins, given the low returns of mutual funds.
Reduction in Direct Government Contribution
The Finance Minister, Mehmet Simsek, had stated that the Government’s
direct contribution was high and unsustainable in the long run, adding that
the Government had no plans to lower the contribution amount in the near
or medium term. The Government’s total contribution at the end of 1Q15
stood at TL3.6bn. Although the direct Government contribution is high,
and will increase substantially as the penetration rate in the private
pension sector increases, we believe the Government’s direct contribution
will continue in the short- and mid-term. However, in case the auto
enrollment is introduced, a reduction in the Government contribution is
highly likely, as the need to attract new participants through direct
contributions would be reduced. Besides, a reduction in the direct
Government contribution would lower the
maximum chargeable fee
amount, as the total fees have been capped at some proportional
amounts of state contributions depending on the exit year.
Transfers From Occupational Pensions
Large corporations and groups have their own pension systems, which
are referred to as “occupational pensions”. The Government implemented
some reforms, such as tax incentives, aimed at triggering transfers from
these funds to private pensions. Tax incentives for transfers started in
2008 and will continue until the end of 2015. Although the Government
22
June 17, 2015
Any further regulations to tighten
consumer loans would adversely
affect the life insurance and
personal
accident
premium
production.
RESEARCH
has sought to promote transfers, a total of TL0.4bn in funds have been
transferred from occupational funds to private pensions. The main reason
behind the low level of transfers has been that occupational funds also
invest in real estate, stocks bonds and/or their own corporations. Returns
on occupational funds are often comparatively high when compared to
private pension funds, while the participants of occupational funds also
enjoy some other benefits such as health insurance or preferential and
cheaper access to credit. We do not deem the transfers between
occupational funds and private pension system to be material in the
medium term and more incentives and an improved capital system is
required, in our view.
Intensifying competition
Consumer loans rose by CAGR of
30% between 2004 and 2014;
however, recent regulations aimed
at curbing consumer loan growth
have been putting pressure on this
growth. Any further regulations to
tighten consumer loans would
adversely affect life insurance and
personal
accident
premium
production.
The top 5 private pension companies - Anadolu Hayat, AvivaSA, Garanti
Emeklilik, Allianz Yasam Emeklilik, and Vakif Emeklilik - have dominated
the sector in recent years. These top 5 players had a total market share of
66% in terms of participants and 76% in terms of AUM as of December
2014. However, new entrants to the market such as Ziraat Hayat Emeklilik
and Halk Hayat ve Emeklilik have gained market share from the top 5
players since the end of 2012. A total of 1.9mn new participants have
joined the system since the enactment of the new regulations on 1
January 2013, and the sector’s AUM increased by TL17.3bn between
January 2013 and December 2014. The aforementioned five big players
commanded a 53% market share in the number of new participants and
71% in AUM added to the system since the end of 2012. Additionally, we
expect the market shares of bank affiliated pension companies to
converge with the market shares of the banks they are affiliated to in the
long term, such that the market shares of AvivaSA and Anadolu Hayat
would approach those of Akbank and Isbank, respectively.
Halkbank is considering a disposal of Halk Hayat, Halkbank’s 100%
subsidiary. The potential acquirer of Halk Hayat may enter the private
pension market aggressively, which would trigger an extra competition in
the sector.
Halkbank, owns 100% of Halk Hayat, considers to dispose Halk Hayat.
Potential acquirer of Halk Hayat may enter the private pension market
aggressively, which would trigger competitive dynamics of the sector.
Lapse ratio
The lapse ratio is defined as the ratio of the number of policies that lapse
during a period to the total number of policies written at the beginning of
that period. The lapse ratio has a crucial bearing on the profitability of
private pension companies as the private pension companies are
burdened by commission payments of up to 15-20% in the first year to the
brokers, while commissions decline to 1-2% going forward. As a private
pension acquires a new customer, there is a net cash outflow in the first
year resulting from commissions, and net cash inflows are recorded going
23
June 17, 2015
forward. Hence, a participant is more profitable for a private pension
company as they remain in the system for longer. The average yearly
lapse ratio in the sector stood at 11% between 2010 and 2013, meaning
that 11% of all participants exited the system every year.
The Government has sought to take measures aimed at decreasing the
lapse ratio, such as tying the portion of entitlement to receive government
contributions on the year a participant exits the system. Further measures
to reduce the lapse ratio would pose upside challenges to the sector.
Slowdown in loan growth
As previously mentioned, gross written premiums in the life insurance and
personal accident segment are highly correlated with the rate of consumer
loan growth, as these products are cross-sold through the bancassurance
channel. Consumer loans rose by CAGR of 30% between 2004 and 2014;
however, recent regulations aimed at curbing consumer loan growth have
been putting pressure on this growth. Any further regulations to tighten
consumer loans would adversely affect life insurance and personal
accident premium production. According to the BRSA’s latest banking
sector data, the 13 week FX adjusted consumer loan growth stands at
12.3% as of the most recent weekly banking data. Any deterioration in the
macro-economic outlook or slowdown in consumer loan growth could
compromise the GWPs of these segments.
Consumer Loan Growth (FX adjusted 13 week rolling sum)
45.0%
33.0%
21.0%
9.0%
-3.0%
-15.0%
01.08
04.08
08.08
12.08
03.09
07.09
10.09
02.10
06.10
09.10
01.11
05.11
08.11
12.11
04.12
07.12
11.12
03.13
06.13
10.13
02.14
05.14
09.14
12.14
04.15
We
believe
that
direct
Government
contribution
will
continue in the short and mid
term.
RESEARCH
15% limit
Consumer Loans
Source: BRSA, Garanti Securities
24
June 17, 2015
RESEARCH
Anadolu Hayat
Outperform
Turkey - Equity - Private Pension
Coverage Initiation
Potential Return
24%
Current Mcap (TLmn)
Price Performance (TL)
7.0
6.2
5.4
4.6
3.8
07.14
05.14
03.14
01.14
3.0
A wide distribution network: Anadolu Hayat has a wide range
of bancassurance channels, enabling the Company to hold onto
its solid market position. Anadolu Hayat is the market leader in
the private pension business while ranking as the number two in
life insurance. The Isbank brand, as well as solid business
model, allows Anadolu Hayat to consolidate its position in the
market.
2,094
ANHYT
BIST100
Stock Market Data
Bloomberg/Reuters:
Strong AUM growth: Anadolu Hayat’s AUM has grown at a
CAGR of 32% since the beginning of 2013, when the regulator
pushed through radical reforms in the sector. We forecast a
CAGR of 23% in Anadolu Hayat’s AUM between 2014 and
2024, to reach TL59bn.
ANHYT.TI / ANHYT.IS
1 mth
3 mth
6%
9%
52 Week Range (TL):
12mth
19%
4.16 / 5.83
Average Daily Vol (US$mn) 3 mth:
YTD TL Return:
Life segment to continue to contribute to profitability
Anadolu Hayat is the 2nd largest player in the life insurance
segment with an 11% market share as of 2014. We project a
12% CAGR in the Anadolu Hayat’s life insurance GWPs over
the next 10 years. The growth momentum in the life insurance
business will continue to support Anadolu Hayat’s bottom line.
05.15
Anadolu Hayat stands out with its solid business
model, high contact ability with customers, Isbank’s
high reputation brand and achievement of economies
of scale.
6.85
03.15

Anadolu Hayat is a preferential company in the
Turkish private pension & life insurance sector due to
its strong position in the market. The Company is the
market leader in the private pension business and
ranks in second place in life insurance.
01.15

We initiate the coverage of Anadolu Hayat with an
Outperform recommendation. Our 12 month target
price of TL6.85 indicates 24% upside potential.
5.51
11.14

Current Price (TL)
09.14
A well deserved reputation
0.2
10%
Free Float (%):
380
17
Research Analyst: Recep Demir
+90 (212) 384 1132
Financials and Ratios
Life GWP (TL mn)
AUM (TL mn)
2013
2014
2015E
2016E
394
365
416
474
5,243
7,400
9,594
12,408
Net Income (TL mn)
83
98
120
151
Life Technical Profit (TL mn)
63
64
69
84
Pension Tech. Profit (TL mn)
[email protected]
Research Analyst: Cem Emre Bilgin
+90 (212) 384 1139
[email protected]
-11
4
15
35
Life Technical Margin
17%
17%
18%
20%
Sales Contact:
P/E (x)
25.2
21.4
17.5
13.8
+90 (212) 384 1155-58
3.9
3.4
3.1
2.8
P/BV (x)
P/GWP (x)
5.3
5.7
5.0
4.4
ROAE
16%
17%
19%
21%
EPS (TL)
0.22
0.26
0.32
0.40
[email protected]
25
June 17, 2015
We believe that ANHYT shares
still have strong upside potential
stemming from strong growth
prospects of the private pension
sector as a whole and Anadolu
Hayat’s
successful business
model and widespread distribution
channels.
RESEARCH
INVESTMENT THEME
With this report, we initiate Anadolu Hayat’s coverage with
Outperform recommendation. Our 12M target price stands at TL6.85,
indicating 24% upside potential. Although ANHYT shares has
outperformed BIST-100 index by 19% in the last 12 months, we
believe that ANHYT shares still have strong upside potential
stemming from strong growth prospects of the private pension
sector as a whole and Anadolu Hayat’s successful business model
and its widespread distribution channels. Anadolu Hayat is the
market leader in private pension business and ranks number two in
the life segment.
Strong AUM growth. As one of the most important players in the private
pension sector, we believe that Anadolu Hayat will also be one of the main
beneficiaries of the strong growth prospects of the sector going forward.
Anadolu Hayat’s AUM grew by CAGR of 32% since beginning of 2013,
when revolutionary regulations took place. We forecast Anadolu Hayat’s
AUM will grow by CAGR of 23% between 2014 and 2024 and reach to
TL59bn. Our growth forecast for the sector also stands at CAGR of 23%
for the same period. Accordingly; total number of participant of the
Anadolu Hayat’s private pension business will rise from 895k to 2.2mn
between 2014 and 2024, indicating CAGR of 10%.
A slight deterioration in private pension market share. Anadolu Hayat
is the market leader in private pension business in Turkey and has a
market share of 19.2% in the private pension business in terms of AUM by
the end of 1Q15. With new players such as Ziraat Hayat Emeklilik and
Halk Hayat ve Emeklilik aggressively entering the sector, we project that
the Company will be able to sustain its market share close to the current
levels; we forecast a 19.5% market share for Anadolu Hayat in 2015, and
19% in 2020.
Fund Management Fee/AUM ratio to remain at the level of 1.50%.
Anadolu Hayat’s average Fund Management Fee/AUM ratio was realized
at 1.91% between 2011 and 2014 period and realized at 1.53% in 2014.
We project a Fund Management Fee/AUM ratio (on a gross basis) of
1.75% for 2015 followed by 25bps gradual decline in the ratio to 1.5%
between 2016 and 2020, and 1.50% going forward.
Management Fee & Entrance Fee: The regulator undertook further
adjustments relating to the management fees and entrance fees on 25 th
May. According to the latest regulations, entrance fee and management
fees will be aggregated under a new income statement line. Previously,
the cap on management fees stood at 2% and entrance fee rates varied
between 0% and 75% of the gross monthly minimum wage, depending on
the exit year. Under the new arrangements, the sum of the two fee lines
may not exceed 8.5% of the gross monthly minimum wage within the first
5 years (the gross monthly minimum wage currently stands at TL1,200 per
month). The management fees and entrance fee will not be charged after
the 5th year. The sum of the two fee lines may not exceed 8.5% of the
gross monthly minimum wage within the first 5 years. It means that
26
June 17, 2015
Anadolu Hayat and other private pension companies may charge a total of
around TL500 per customer within the first 5 years of the contract. New
regulations will simplify the charging structure of the private pension
contracts and will attract more participants to the system in the long run.
However, the new regulations will also put pressure on private pension
companies’ profits on these lines in the first two years of implementation
(2016 and 2017). Entrance & management fees constituted 32% of
Anadolu Hayat’s total pension technical income in 2014; however, we
project that the contribution from these revenue lines will decline to 26% in
2016 and 23% in 2017.
Evolution of Technical Profit (TL mn)
800
640
480
320
160
Pension technical profit
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
2013
-160
2012
0
2011
Strong earnings prospects of
Anadolu Hayat will enable the
Company to post higher Return on
Equtiy (RoE) in upcoming periods.
RESEARCH
Life technical profit
Source: Anadolu Hayat, Garanti Securities Estimates
Growth in life insurance business to remain intact. Anadolu Hayat
ranked as the number two, following Ziraat Emeklilik, in the life insurance
business at the end of 2014, with an 11.1% market share. With strong
bancassurance channels (mainly through Isbank), a broker-agency
network and a direct sales team consisting of 387 licensed salespersons,
we believe Anadolu Hayat will sustain its strong position in the life
insurance sector going forward. We project a 12% CAGR in gross written
premiums between 2014 and 2024 with the insurer’s market share
fluctuating around 11%.
21% CAGR in net earnings. Anadolu Hayat reported net earnings of
TL98mn in 2014, and we forecast a bottom line of TL120mn in 2015. Our
forecasts indicate that the bottom line will grow at a CAGR of 21%
between 2014 and 2024. We project a 25% CAGR for total technical profit
for the same period, driven by a 60% CAGR in the pension technical profit
and an 14% CAGR in the life technical profit.
A generous dividend payer. Anadolu Hayat have been a consistent
dividend payer with an average dividend payout ratio of 57.7% over the
last 5 years. We believe Anadolu Hayat will continue to pay generous
dividends going forward and we have assumed an average dividend
payout ratio of 50% between 2014 and 2024 in our valuation.
27
June 17, 2015
Although we believe that Anadolu
Hayat is able to keep its current
strong
position;
aggressive
expansion strategies of new
entrants and potential entrants to
the market (such as Halk Hayat’s
sale) may hurt Anadolu Hayat’s
market position
RESEARCH
RISKS
Regulatory risk: High dependency on regulatory changes is a sectorwide risk for private pension and life insurance companies. The regulator
works to strict norms and readily intervenes in the sector. The regulator’s
actions have a more pronounced impact that the fundamentals of the
sector such as demand and supply or demographics. Such a high level of
dependence on regulatory changes exposes sources of both upside and
downside. The main regulatory upside challenges include prospective
changes regarding severance payments, implementation of the auto
enrollment system, incentives to increase transfers from occupational
funds; the main risks would be further reductions in the caps on fees and
cuts in the direct state contribution in the long run.
Intensifying competition: New entrants into the market such as Ziraat
Hayat Emeklilik and Halk Hayat ve Emeklilik have captured market share
from the top 5 players since the end of 2012. Anadolu Hayat’s market
share in the private pension sector declined from 21% in 2012 to 19.6% in
2014 in terms of AUM. Although we believe Anadolu Hayat will be able to
maintain its current strong position in both the private pension and life
insurance segments, the aggressive expansion strategies pursued by new
entrants and potential entrants to the market (such as the sale of Halk
Hayat) may weaken Anadolu Hayat’s market position and cast a shadow
over our valuation.
Slowdown in loan growth: There is a very strong correlation between
GWP production in the life insurance segment and consumer loan growth,
because these products are cross-sold through the bancassurance
channel. The weight of the vitally important bancassurance channel in
Anadolu Hayat’s life insurance products stood at 72% as of 2014. A
slowdown in consumer loan growth and further restrictive regulations on
consumer loans would put pressure on Anadolu Hayat’s life insurance
technical income.
Reduction in direct Government contribution: The Finance Minister,
Mehmet Simsek, had stated that the direct Government contribution was
high and unsustainable in the long run, while adding that the Government
doesn’t plan to lower the contribution amount in the near or medium term.
Although we have not assumed any reduction in the Government’s
contribution in our valuation, a decline in the Government contribution
would dent pension technical incomes for both the sector and AvivaSA.
Besides, a reduction in the direct Government contribution would lower the
maximum chargeable fee amount, as the total fees have been capped at
some proportional amounts of state contributions depending on the exit
year.
Low trading volume: Another risk factor when it comes to investing in
Anadolu Hayat is the low trading volume of the shares. The average daily
trading volume over last 3 months was TL0.5mn, which could present a
liquidity risk for large scale investors.
28
June 17, 2015
RESEARCH
VALUATION
Our 12M target price is derived from Dividend Discount Model (DDM). Our
cost of equity assumption stands at 13.7%. We assigned beta of 0.9,
equity risk premium of (ERP) of 5.5% and risk free rate of 8.75%.
Terminal growth assumption for the period beyond 2024 is 8.5%.
Assumptions:
2013
83
40
48%
2014
98
50
51%
COE
RfR
Risk Premium
12M Mcap (TL mn)
12M TP (TL mn)
2,604
6.85
Current Price
Upside
5.51
24%
AUM: We project 23% CAGR in AUM between 2014 and 2024 for
AvivaSA, in line with the sector growth rate of 23% CAGR.

Gross Written Premiums: Our projection for GWP growth in life
segment between 2014 and 2024 stands at 12% CAGR, which is in
line with the our projection for the sector growth rate of 12% CAGR
in the same period.

Expenses: We forecast a 6.4% CAGR in life technical expenses for
the next 10 year period, while our growth projection for pension
technical expenses stands at 12.5% in the same period.

Dividend Policy: We have assumed an average dividend payout
ratio of 50% between 2014 and 2024 in our valuation.
2015E
120
60
50%
0.93
56
2016E
151
76
50%
0.82
62
2017E
171
86
50%
0.72
62
2018E
208
104
50%
0.63
66
2019E
262
131
50%
0.56
73
2020E
302
151
50%
0.49
74
2021E
349
174
50%
0.43
75
Terminal
13.7%
8.75%
5.5%
13.7%
8.75%
5.5%
13.7%
8.75%
5.5%
13.7%
8.75%
5.5%
13.7%
8.75%
5.5%
13.7%
8.75%
5.5%
13.7%
8.75%
5.5%
13.3%
8.75%
5.0%
ANHYT Trailing P/BV Ratios
1,720
ANHYT Trailing P/AUM Ratios
0.70x
3.5x
0.58x
3.0x
0.46x
2.6x
0.34x
2.1x
0.22x
1.6x
0.10x
01.10
04.10
07.10
10.10
01.11
04.11
07.11
10.11
01.12
04.12
07.12
10.12
01.13
04.13
07.13
10.13
01.14
04.14
07.14
10.14
01.15
04.15
4.0x
P/BV
-1s
3,983
Avg.
+2s
+1s
-2s
01.10
04.10
07.10
10.10
01.11
04.11
07.11
10.11
01.12
04.12
07.12
10.12
01.13
04.13
07.13
10.13
01.14
04.14
07.14
10.14
01.15
04.15
DDM (TL mn)
Net Profit
Dividend
Dividend Payout Ratio
Discount Factor
DCF

P/AUM
-1s
Avg.
+2s
+1s
-2s
Source: Garanti Securities Estimates
29
June 17, 2015
COMPANY OVERVIEW
Shareholder Structure
Anadolu Hayat was established in 1990 and was the first company to
operate in the life insurance business in Turkey. Following the
establishment of the private pension system in Turkey, Anadolu Hayat
was among the early players in the business. The Company’s
headquarters are located in Istanbul. It operates through three regional
offices in Istanbul, two regional offices in Ankara and regional offices in
Adana, Bursa, Izmir, Kocaeli, Antalya and Trabzon, the Turkish Republic
of Northern Cyprus, along with a direct sales team and over 300 agents.
Anadolu Hayat Emeklilik boasts with having Turkey's most extensive
62%
bancassurance network. The Company effectively uses over 1,500
Isbank, Anadolubank, and Albaraka branches as the key distribution
channel in its service process.
17%
1%
20%
Isbank
Milli Reasürans
Source: The Company
RESEARCH
Anadolu Sigorta
Free Float
Shareholder structure: Isbank is the Company’s controlling shareholder
with a 62% share. Anadolu Sigorta owns 20% of the shares while Milli
Reasürans has a 1% stake. The remaining 17% of the shares are publicly
traded on the BIST.
A widespread network: Anadolu Hayat owns widespread distribution
channels in what is one of the most important differentiating factors for the
Company in both the private pension and life insurance businesses. The
Company has bancassurance agreements with Isbank (1,350 branches),
Anadolubank (87 branches), and Albaraka (203 branches). The
Company’s bancassurance network consists of 4 banks and 1,640
branches. Anadolu Hayat’s agreement with HSBC, which provided an
initial contribution of 19% of the pension products in 2012, was terminated
in July 2013. The Company also has a direct sales team consisting of 442
licensed sales staff, agreements with 287 exclusive agencies and 62
brokers, while also operating in other distribution channels such as the
online channel and the call centre. Bancassurance is the most important
pension production channel, with 67% of initial contributions made through
this channel. On the life insurance front, 72% of initial premium production
took place through bancassurance.
Pension Production by Channel (Initial Contribution Payments)
Channels
2013
2014
2015/03
Direct to Customer
6%
2%
1%
Broker
1%
1%
1%
Agency
21%
30%
29%
Bancassurance (Total)
72%
67%
69%
Isbank
1%
1%
3%
Isbank + Direct Sales
58%
52%
52%
Isbank + Agency
8%
13%
14%
HSBC
4%
0%
0%
Other
1%
1%
0%
100%
100%
100%
Total
Source: Anadolu Hayat
30
June 17, 2015
RESEARCH
We forecast AUM to grow by 23%
CAGR between 2014 and 2024,
and number of participants to
increase by 10% CAGR during
same period.
Anadolu Hayat is able to maintain its position in private pensions:
The Company is the market leader in the private pension business with a
19.2% market share in terms of AUM as of 1Q15. Given its widespread
network channels, successful business model and high recognition
through the Isbank brand, we believe Anadolu Hayat will be able to
maintain its strong position in the market, even as new entrants such as
Ziraat Hayat Emeklilik and Halk Hayat ve Emeklilik have captured market
share from top 5 players since the end of 2012. We forecast a 23% CAGR
in the AUM between 2014 and 2024 with the number of participants
increasing at a CAGR of 10% during the same period.
AUM and # Participants Forecasts
Anadolu Hayat’s Market Share in Private Pension
70
2.5
22%
56
2.0
21%
42
1.5
20%
28
1.0
19%
14
0.5
18%
0
0.0
17%
AUM (TL bn) - LHS
# of participants (mn) - RHS
ANHYT Market Share in terms of AUM
Source: EGM, Garanti Securities Estimates
Source: EGM, Garanti Securities Estimates
Growth momentum in GWPs to continue: We project that gross written
premium production in the life insurance segment will rise at a 12% CAGR
between 2014 and 2024. We are more cautious when it comes to the
growth prospects of life insurance business than for the private pension
segment, due to the slowdown in consumer loan growth on the back
of recent regulations, which are aimed at curbing the overheated growth in
consumer loans in recent years. Anadolu Hayat’s strong bancassurance
distribution channel, which constitutes 77% of initial premium
production, will remain a competitive advantage.
Anadolu Hayat’s Channels in Life Insurance
Breakdown of Life Technical Profit
Earned Premiums - LHS
GWPs - LHS
Source: Anadolu Hayat, Garanti Securities Estimates
2024E
2023E
2022E
0%
2021E
0
2020E
5%
2019E
280
2018E
10%
2017E
560
2016E
15%
2015E
840
2014
20%
2013
1,120
2012
25%
2011
1,400
Life Tech. Margin - RHS
Life Insurance Channels
2013
2014
2015/03
Agency & Broker
16%
15%
9%
Direct to Customer
19%
13%
14%
Bancassurance (Total)
65%
72%
77%
Isbank
60%
60%
71%
Isbank+Direct+Agency
5%
6%
6%
100%
100%
100%
Total
Source: Anadolu Hayat
31
June 17, 2015
RESEARCH
1Q15 Results
Anadolu Hayat announced its 1Q15 bottom line as TL34mn profit vs.
TL34.3mn in 4Q14 and TL23mn net profit in 1Q14. Accordingly, Anadolu
Hayat’s bottom line remained flat QoQ and increased by 48% YoY.
Consensus estimate for Anadolu Hayat’s bottom line was TL31mn in
1Q15.
Total technical income of Anadolu Hayat rose to TL29mn in 1Q15 from
23.2mn in the previous quarter. The main reason of the increase on the
technical income is the successful performance in pension income
segment, supported by decline in the operational expenses. On the
pensions side, we observed a slight decline in the contribution growth from
6.2% in 4Q14 to 5.7% in 1Q15. On the other hand, net investment income
declined to TL20mn in 1Q15 from TL22mn in 4Q14. Other expenses,
which rose by 20% YoY mainly due to increase in amortization and
provisions, put pressure on the bottom line in 1Q15.
Based on 1Q15 results, ROE has been realized at 22.6% in 1Q15,
implying 4.8pp improvement YoY.
Income Statement (TL mn)
1Q14 2Q14 3Q14 4Q14 1Q15 Chg.(QoQ) Chg.(YoY)
Life Gross Premiums
84
86
88
107
100
-6%
20%
Life technical income
130
116
152
153
164
7%
26%
Life technical expense
-120
-114
-123
-129
-144
n.m.
n.m.
10
1
28
24
21
-15%
109%
Non-life technical profit
0
0
0
0
0
n.m.
-40%
Pension business income
37
40
43
46
49
7%
33%
Pension business expense
-37
-41
-38
-47
-41
n.m.
n.m.
0
0
5
-1
8
n.m.
11107%
Total technical profit
10
1
33
23
29
25%
191%
Investment income (net)
22
13
10
22
20
-10%
-8%
Other income/expense
-4
-1
-3
-1
-5
n.m.
n.m.
Profit before tax
28
13
40
44
44
-1%
58%
Tax
-5
-5
-8
-10
-10
n.m.
n.m.
Net Income
23
9
32
34
34
-1%
48%
Growth (YoY)
Pension AUM
Gross Premium Life (YoY)
Pension Technical Profit
1Q14
2Q14
7.8%
20.2% 24.6% 41.1% 4.0%
-37.1 pp
-3.8 pp
-19.3% -23.6% -15.7% -7.5% 19.9%
27.4 pp
39.2 pp
n.m.
n.m.
n.m.
n.m.
3Q14
n.m.
4Q14
n.m.
1Q15 Chg.(QoQ) Chg.(YoY)
n.m.
Total Technical Profit
-19.2% -53.4% 12.4% 29.0% 191.0
162 pp
210.1 pp
Net Earnings
-3.2% -24.5% 0.7%
17.5% 47.9%
30.4 pp
51 pp
ROE
17.8% 12.1% 16.0% 17.9% 22.6%
4.6 pp
4.8 pp
11.8%
6.7% 15.8% 18.1% 20.7%
2.6 pp
8.9 pp
Leverage
16.6x
17.0x
99.3 pp
98.4 pp
Key Financial Ratios
16.6x
16.6x
17.6x
32
June 17, 2015
RESEARCH
SUMMARY FINANCIALS
2012
2013
2014
2015E
2016E
2017E
Life Gross Premiums
367
394
365
416
474
540
503
599
550
568
611
663
-469
-535
-487
-498
-527
-566
33
63
64
69
84
98
0
0
0
0
0
0
139
132
167
203
254
298
-120
-143
-163
-188
-219
-257
19
-11
4
15
35
41
53
52
67
84
120
139
60
53
67
75
79
85
-7
-7
-9
-9
-10
-10
Profit before tax
106
98
126
150
189
214
Tax
-26
-15
-28
-30
-38
-43
Reported net earnings
80
83
98
120
151
171
Reported EPS
0.27
0.24
0.26
0.32
0.40
0.45
DPS
0.13
0.11
0.13
0.16
0.20
0.23
Balance Sheet (TL mn)
2012
2013
2014
2015E
2016E
2017E
Cash & financial investments
707
758
897
963
1,042
1,134
Investments of policyholders
2,118
1,788
1,736
1,649
1,567
1,489
Receivables from pension business
4,286
5,239
7,396
9,588
12,401
15,421
63
69
62
66
70
74
Other receivables
Other assets
48
49
63
67
71
76
Total assets
7,222
7,902
10,154
12,334
15,152
18,194
Payables due to pension business
4,366
5,355
7,539
9,774
12,641
15,720
11
9
16
17
18
19
Other payables
Mathematical reserves
2,206
1,871
1,842
1,749
1,662
1,579
Unearned premium reserves
23
21
19
20
21
23
Outstanding claims reserves
56
75
71
76
80
85
Other technical reserves
4
6
8
9
9
10
Other liabilities
32
32
47
16
-29
-76
Shareholders' equity
525
534
613
672
748
834
Total liabilities
7,222
7,902
10,154
12,334
15,152
18,194
2012
2013
2014
2015E
2016E
2017E
ROE
16.7%
15.7%
17.1%
18.6%
21.3%
21.7%
9.8%
17.4%
17.3%
18.5%
20.0%
20.3%
Leverage
13.8x
14.8x
16.6x
18.3x
20.3x
21.8x
Dividend Payout
50.3%
48.1%
51.2%
50.0%
50.0%
50.0%
33
June 17, 2015
RESEARCH
AvivaSA
Outperform
Turkey - Equity - Private Pension
Coverage Initiation
A robust growth story
60.00
Potential Return
31%
Current Mcap (TLmn)
By taking into account the regulator’s enthusiastic
support for private pensions, AvivaSA’s strong
bancassurance network and the expertise and
reputation derived from its main shareholders, Sabanci
Holding and Avisa, we believe AvivaSA presents an
exciting and profitable growth story.
1,644
Price Performance (TL)
55.00
52.00
49.00
46.00
Its strong presence on the corporate pension side
supports the AUM in the private pensions business,
while profitability will continue to be buttressed by
economies of scale going forward.
A growth story: The Government has placed strong emphasis on
the private pension business to incentivize savings in Turkey.
AvivaSA will be one of the main beneficiaries of the process going
forward due to its wide bancassurance network, fast growing
agency network and strong presence in the corporate pension
segment; hence, we forecast a CAGR of 23% in the Company’s
AUM between 2014 and 2024.
AVISA
06.15
05.15
04.15
02.15
40.00
03.15
43.00
01.15

12.14

We initiate coverage of AvivaSA with an Outperform
recommendation and a 12 month target price of
TL60.00, indicating 31% upside potential.
45.95
11.14

Current Price (TL)
BIST100
Stock Market Data
Bloomberg/Reuters:
AVISA.TI / AVISA.IS
AvivaSA set to outperform the sector in the life protection
business: AvivaSA currently ranks as the number six in the
market. As premium production in the life insurance segment is
correlated with consumer loans, it is highly likely that AvivaSA’s
market share will converge with Akbank’s market share in the
consumer segment, which stood at 10.3% as of 1Q15. We
forecast a further improvement in AvivaSA’s market share in the
life protection segment from the current 7.2% to 9.5%, and a
CAGR of 13% in the life protection technical profit.
1 mth
3 mth
Since IPO
-1%
4%
1%
52 Week Range (TL):
42.92 / 52
Average Daily Vol (US$mn) 3 mth:
0.7
YTD TL Return:
5%
36
Free Float (%):
20
Research Analyst: Recep Demir
+90 (212) 384 1132
Financials and Ratios (IFRS)
Life GWP (TL mn)
AUM (TL mn)
2013
2014
2015E
2016E
178
197
251
306
[email protected]
5,019
7,130
9,053
11,512
Net Income (TL mn)
72
87
110
139
+90 (212) 384 1139
Life Technical Profit (TL mn)
89
106
126
154
[email protected]
Pension Tech. Profit (TL mn)
92
114
136
158
P. Accident Tech. Profit (TL mn)
14
15
17
21
P/E (x)
23.0
18.9
14.9
11.8
P/BV (x)
6.1
4.9
4.2
3.5
P/GWP (x)
9.2
8.4
6.6
5.4
ROAE
28%
29%
30%
32%
EPS (TL)
2.00
2.43
3.08
3.88
Research Analyst: Cem Emre Bilgin
Sales Contact:
+90 (212) 384 1155-58
[email protected]
34
June 17, 2015
RESEARCH
INVESTMENT THEME
We initiate the coverage of AvivaSA with an Outperform
recommendation. Our 12 month target price of TL60.00 indicates 31%
upside potential. AvivaSA started to trade on the BIST on 13
November 2014, being the 2nd private pension company to be listed
on the BIST. AvivaSA will be one of the main beneficiaries of the
strong growth prospects of the Turkish private pension sector and
life insurance market.
IFRS financials vs statuary financials. We used IFRS financials in our
forecasts and valuation of AvivaSA, whereas statutory financials for
Anadolu Hayat. While AvivaSa publishes its IFRS financial statements, in
addition to the statuary financials; Anadolu Hayat does not. The main
difference between the IFRS and the statutory financials is the approach
to commission expenses. As a private pension company acquires a
customer, there is often a net cash outflow at first due to commissions
paid to intermediaries and a cash inflow which follows as the customer
pays their premiums to the company. The statutory financial statements
reflect these commission expenses as they occur while the IFRS financial
statements defer the commission expense to a time horizon (generally 9
years). Statutory financials are much more close to a cash flow statement
in that sense.
AUM growth momentum to continue. AvivaSA’s AUM grew at a CAGR
of 34% between 2011 and 2014, and we expect AvivaSA’s AUM to grow
at a CAGR of 23% between 2014 and 2024, in line with the private
pension sector’s growth rate in the same period. Accordingly, we forecast
that AvivaSA’s AUM to be realized at TL9.05bn in 2015 to reach TL54.4bn
in 2024. In terms of the number of participants, AvivaSA has 762k
participants as of 1Q15, and we project that this number will reach 838k
by 2015 end and 1.8mn by 2024 end, indicating a CAGR of 10% for the
period between 2014 and 2024.
Pension Segment Projections:
- Fund Management Fee: Note that the Fund Management Fee/AUM ratio
averaged 2.03% over the last 4 years for AvivaSA. We project a Fund
Management Fee/AUM ratio (on a gross basis) of 1.70% for 2015 followed
by a 20bps decline in the ratio to 1.5% between 2016 and 2018, and
1.40% going forward.
- Management Fee & Entrance Fee: The new regulations introduced on
25th May brought in major changes in management fees and entrance
fees. According to the latest regulations, entrance fee and management
fees will be aggregated under a new income statement line. Previously,
the cap on management fees stood at 2% and entrance fee rates varied
between 0% and 75% of the gross monthly minimum wage, depending on
the exit year. Under the new arrangements, the sum of the two fee lines
may not exceed 8.5% of the gross monthly minimum wage within the first
35
June 17, 2015
RESEARCH
5 years (the gross monthly minimum wage currently stands at TL1,200 per
month). The management fees and entrance fee will not be charged after
the 5th year. The sum of the two fee lines may not exceed 8.5% of the
gross monthly minimum wage within the first 5 years. This means that
AvivaSA and other private pension companies may charge a total of
around TL500 per customer within the first 5 years of the contract. New
regulations will simplify the charging structure of the private pension
contracts and attract more participants to the system in the long run.
However, new regulations will also put pressure on private pension
companies’ profits on these lines in the first two years of implementation
(2016 and 2017). Entrance & management fees constituted 43% of
AvivaSA’s total pension technical income in 2014; however, we project
that contribution of these revenue lines will decline to 33% in 2016 and
29% in 2017.
Evolution of Pension Technical Income
800
62
640
58
Entrance fee income
Management fee income
343
494
593
2024E
286
412
2023E
234
68
2022E
215
2021E
45
50
49
59
46
51
2020E
144
41
44
2019E
117
179
2017E
2013
31
87
2016E
2012
36
2015E
30
18
69
39
32
2014
28
57
20
32
75
2011
0
16
36
35
37
35
2018E
320
160
78
53
480
90
Fund management fee income
Source: AvivaSA, Garanti Securities Estimates
Our monthly lapse rate assumption is 1.2% for 2015, 1.15% for 2016 and
1.1% thereafter. We project a 14% CAGR in net commission expenses. All
in all, AvivaSA’s total technical profit will increase by 19% CAGR between
2014 and 2024.
Pension segment forecasts
2013
2014
2015E
2016E
2017E
Fund management fee income
69.0
87.0
116.9
144.2
179.4
Management fee income
17.9
30.9
34.9
31.9
35.3
Entrance fee income
30.4
35.7
36.2
39.1
36.5
Operational Income
117.2
153.6
188.0
215.2
251.3
Other Income/ (Expenses)
-5.8
-7.4
-8.5
-9.8
-11.9
Net Commission Expenses
-19.6
-32.0
-43.8
-46.9
-54.4
-56.6
-70.2
-75.8
-81.9
-88.4
37
38.2
32
35
34
91.8
114.2
135.6
158.5
184.9
Commission Expenses
DAC
Technical Profit
36
June 17, 2015
RESEARCH
Life Protection Segment Projections:
AvivaSA’s market share in life protection nearly doubled from 3.7% in
2011 to 7.2% in 2014. As the premium production in life protection exhibits
a high correlation with consumer loan growth, we expect AvivaSA’s
market share in this segment to approach to Akbank’s market share in
consumer loans. Although Akbank has succeeded in improving its market
share in consumer loans by 1pp since 2011 end, Akbank has recently
started to focus on the SME segment. Hence, any further improvement in
AvivaSA’s position in the life protection segment may be limited. Our
market share projections for AvivaSA in the life protection business are
8% for 2015, 8.5% in 2016, 9% in 2017 and 9.5% thereafter.
-Assumptions: A claims ratio of 17.7% was realized in 2014 and we
forecast a gradual increase in the claims ratio going forward (2015F:
18.1% and 2024F: 20.8%). The surrender ratio declined from 7.2% in
2013 to 4.2% in 2014 and we forecast further improvements (2015F: 3.0%
and 2024F: 2.0%). We assume a commission ratio of 17.0%, and we
expect the ratio to rise gradually towards 20% going forward. In
conclusion, we project a 12% CAGR in the life protection technical profit
between 2015 and 2024, and a normalization in the life technical margin,
from 60.4% in 2014 to 57.1% in 2024.
Life protection forecasts
2013
2014
2015E
2016E
2017E
Gross Written Premiums (TL mn)
178.3
196.6
250.6
306.2
372.9
Earned Premiums (TL mn)
148.3
171.1
200.5
245.0
298.3
Total Claims (TL mn)
-32.7
-37.5
-42.3
-51.7
-62.9
Commission Expenses (TL mn)
-27.8
-29.4
-34.1
-41.6
-50.7
-1
-1
-1
-1
-1
Other Income, Net (TL mn)
Technical Profit (TRYm)
Technical Margin
87
103
123
151
184
58.5%
60.4%
61.5%
61.6%
61.6%
Personal Accident Segment Projections:
We forecast that AvivaSA’s market share in the personal accidents market
will fluctuate at around 20% going forward. We expect the claims and
commissions ratios to remain broadly steady at around 12% and 46%
respectively in the coming periods. Accordingly, we forecast a 17% CAGR
in technical profit between 2014 and 2024.
Personal accident segment forecasts
2013
2014E
2015E
2016E
2017E
32.4
45.4
51.8
62.2
74.6
Total Claims (TL mn)
-3.2
-4.5
-5.0
-6.0
-7.2
Commission Expenses (TL mn)
-14.8
-16.9
-19.1
-22.9
-27.5
Other Income/(Expense)
-0.2
0.0
0.0
0.0
0.0
Technical Profit
13.9
15.2
17.4
20.9
25.1
37
June 17, 2015
RESEARCH
RISKS
Regulatory risk: High dependency on regulatory changes is a sector
wide risk for private pension and life insurance companies. The regulator
has strict norms and frequently intervenes in the sector. The regulator’s
actions outweigh the fundamentals of the sector such as demand and
supply, demographics etc. Main regulatory upside risks include
prospective changes regarding severance payments, implementation of
the auto enrollment system, incentives to increase transfers from
occupational funds; whereas, main downside risks comprise of further
reductions in caps on fees and decline in the direct government
contribution in the long run.
Escalating competition: Since the beginning of 2013, new players in the
market have been capturing market share. AvivaSA’s market share in the
private pension market declined from 19.9% in 2012 to 18.8% in 2014 in
terms of AUM. We believe AvivaSA will be able to maintain its strong
position as the market reaches equilibrium. However, aggressive
expansion strategies of new entrants and potential entrants to the market
would bruise AvivaSA’s market position and pose downside risks to our
valuation.
Slowdown in loan growth: GWP production and consumer loan growth
are correlated due to the emergence of cross-sale opportunities as
customers obtain consumer loans. Hence, a deceleration in consumer
loan growth would negatively effect the Company’s life technical profit.
Another company specific concern for AvivaSA is Akbank’s increasing
focus on SME and commercial segments in recent periods.
Akbank’s emphasis on SME and commercial segments rather than
consumer segment would create pressure on life protection segment.
Reduction in direct Government contribution: The Finance Minister,
Mehmet Simsek, had stated that the direct Government contribution was
high and unsustainable in the long run, while adding that the Government
doesn’t plan to lower the contribution amount in the near or medium term.
Although we have not assumed any reduction in the Government’s
contribution in our valuation, a decline in the Government contribution
would dent pension technical incomes for both the sector and AvivaSA.
Besides, a reduction in the direct Government contribution would lower the
maximum chargeable fee amount, as the total fees have been capped at
some proportional amounts of state contributions depending on the exit
year.
Low trading volume: AVISA shares have seen an average daily trading
volume of just TL2.1mn over the last 3 months, which may pose some
illiquidity risk for institutional investors. Although the daily trading volume
of AvivaSA shares in the last 3 months has been higher than for Anadolu
Hayat (at TL0.5mn), it remains lower than the TL40mn average of BIST100 companies. Also, AvivaSA has been included in BIST-100 index and
MSCI Small Cap Index, which would be positive factors to increase the
stock’s liquidity.
38
June 17, 2015
RESEARCH
VALUATION
Our 12M target price is derived from Dividend Discount Model (DDM). Our
cost of equity assumption stands at 14.4%. We assigned beta of 1, equity
risk premium of (ERP) of 5.5% and risk free rate of 8.75%.
Terminal growth assumption for the period beyond 2024 is 8.5%.
Assumptions:
DDM (TL mn)

Technical Profit: We expect 16.0% CAGR in total technical profit
between 2014 and 2024. Main driver in the rise in total technical
profit comes from pension segment, as we forecast 18% CAGR in
pension technical profit in the same period.

AUM: We Project 23% CAGR in AUM between 2014 and 2024 for
AvivaSA, in line with the sector growth rate.

Gross Written Premiums: Our projection for GWP growth in life
segment between 2014 and 2024 stands at 15% CAGR, which is
higher than the sector growth rate of 12% CAGR in the same
period. GWP growth in PA segment for the same period is 17%
CAGR.

Expenses: We forecast 9.4% CAGR in general and administrative
expenses for the next 10 year period for AvivaSA, lagging behind
16.0% CAGR in total technical profit.

Dividend Policy: We included 45% dividend payout ratio for the
AvivaSA going forward.
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
2021E
Net Profit
72
87
110
139
177
230
250
294
357
Dividend
26.1
40
50
62
80
103
113
132
161
Dividend Payout Ratio
36%
46%
45%
45%
45%
45%
45%
45%
45%
0.93
0.81
0.71
0.62
0.54
0.48
0.42
DCF
46
51
57
64
61
63
67
1,354
COE
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
14.4%
13.9%
RfR
8.75%
8.75%
8.75%
8.75%
8.75%
8.75%
8.75%
8.75%
Discount Factor
Terminal Growth
8.5%
12M Mcap (TL mn)
2,147
12M TP (TL mn)
60.00
Current Price
45.95
Upside
31%
Terminal
3,257
39
June 17, 2015
RESEARCH
COMPANY OVERVIEW
AvivaSA was founded in October 2007 via merger of Aviva Hayat ve
Emeklilik and Ak Emeklilik. The Company is an equal stake JV between
Aviva and Sabanci Holding. AvivaSA had signed a contract with Akbank,
one of the dominant players in Turkish banking system, in 2006, which
had aimed to form an exclusive cooperation between both parties for 15
years. This agreement was reestablished in September 2014.
Shareholder structure: AvivaSA is owned by Aviva at 41.28%, Sabancı
Holding at 41.28%, and remaining 17.15% of shares are traded on BIST.
AvivaSA’s started to trade at BIST on 13 November 2014, being the 2nd
private pension company listed on the BIST, preceded by Anadolu Hayat.
Distribution channels: AvivaSA has exclusive cooperation with Akbank,
3rd largest private bank in Turkey by branch network with 973 branches.
Akbank’s share in consumer loans is 10.3% and the Bank has a growing
position in commercial and SME banking. In addition to Akbank, the
Company has bancassurance agreements with Odeabank, Burgan Bank,
and Abank. Total branch network of AvivaSA amounts to 1,154 branches
as of 1Q15. AvivaSA also works with 190 agencies, has a corporate sales
team of 30 people, direct sales force of 620 financial advisors and
alternative channel network such as telemarketing and digital platforms.
The Company has the largest direct sales force in the sector, which
enables AvivaSA to reach target customers directly, make cross-sales,
assess customer needs and being less sensitive to rises in commission
expenses. Moreover; AvivaSA has a strong presence in corporate
segment thanks to its corporate sales team, and the Company ranks
number one in employer-sponsored group pension contracts by market
share.
Distribution Channels
Pension Distribution Channels
KEY DISTRIBUTION CHANNELS
6%
Bancassurance
# Branches (Akbank)
973
# Akbank Sales Coaches
400
0%
23%
Agencies
# Agencies
Direct Sales Force
#Financial Advisors
14%
620
Corporate
# Corporate Sales Team
57%
190
30
Banks
DSF
Telemarketing
Agencies
Corporate
Source: AvivaSA
40
June 17, 2015
RESEARCH
Growth in AUM to continue: AvivaSA commands 19% market share in
private pensions, as of 1Q15, ranking number two in terms of AUM.
AvivaSA is also market leader in the corporate segment in private pension
business. The Company exhibited a strong performance in AUM growth,
which was realized at 34% CAGR between 2011 and 2014. We believe
that strong growth in private pension segment will continue going forward,
and we forecast 23% CAGR in AUM and 10% CAGR in number of
participants between 2014 and 2024. Market share of AvivaSA has
declined from 20.6% in 2011 to 18.8% in 2014, on the back of new
players’ entrance to the business. We forecast that market share of
AvivaSA to decline gradually from 19% in 1Q15 end to 17.5% in 2018 end,
and fluctuate at around this level going forward.
AvivaSA’s Market Share in Private Pensions
0.4
17%
0
0.0
AUM (TLmn) - LHS
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2014
2012
16%
2024E
2023E
12,000
2022E
18%
2021E
0.8
2020E
24,000
2019E
19%
2018E
1.2
2017E
36,000
2016E
20%
2015E
1.6
2014
48,000
2013
21%
2012
2.0
2011
60,000
2013
AUM and # Participants Forecasts for AvivaSA
AvivaSA Market Share (AUM)
# of participant
Improvement in market share in life protection: AvivaSA has gained
3.8pp market share in life protection segment since 2011, and gross
written premiums rose by 33% CAGR in the same period, higher than the
sector growth rate of 7% CAGR. We forecast that AvivaSA will continue to
gain market share in life protection segment, and its market share will
increase to 9.5% in 2018 and stabilize at that level going forward. In terms
of GWP production, we believe that AvivaSA’s growth will outpace that of
sector in life protection, as we project 15% CAGR in GWP between 2014
and 2024 for AvivaSA, while our growth forecast for sector’s GWP is 12%.
Claims Ratio
Commission Ratio
Gross Written Premiums - LHS
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
50%
2015E
0
2014
10.0%
2013
53%
2012
160
2011
13.0%
2024E
56%
2023E
320
2022E
16.0%
2021E
59%
2020E
480
2019E
19.0%
2018E
62%
2017E
640
2016E
22.0%
2015E
65%
2014
800
2013
25.0%
2012
GWP Growth and Life Protection Technical Margin
2011
Claims and Commission Ratios in Life Protection
Technical Margin - RHS
41
June 17, 2015
RESEARCH
Diversified product mix in personal accident business: AvivaSA has
19% market share in personal accident sector, ranks number two in the
business. The Company achieved 19% CAGR in personal accident
segment between 2011 and 2014, and we project 17% CAGR in PA
business between 2014 and 2024. Although personal accident constitutes
relatively small portion of total technical income of AvivaSA (6% as of
2014), its profitability is high, technical profit margin of the segment is 42%
as of 2014 end. We forecast that personal accident segment will constitute
6-7% of the total technical income of AvivaSA going forward.
Earned Premiums (TL mn)
Claims Ratio
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
2013
2011
2024E
2023E
2022E
0%
2021E
0
2020E
10%
2019E
50
2018E
20%
2017E
100
2016E
30%
2015E
150
2014E
40%
2013
200
2012
50%
2011
250
2014E
Claims and Commission Ratios in PA Segment
2012
GWP and Earned Premiums in PA Segment
Commission Ratio
Declining expense ratio due to economies of scale: AvivaSA made
large investments in recent years to expand its direct sales channels and
improve its IT infrastructure. The Company’s general and administrative
expenses rose by 15.1% CAGR between 2011 and 2014. Although the
rise in expenses; expense ratio, which is measured as share of expenses
as of net contributions for pensions and gross written premiums for
insurance segment, has been declining. Expense ratio decreased by
7.1pp between 2011 and 2014; from 19.0% to 11.9%; mainly due to
boosted net contributions and GWPs. We forecast that decline in expense
ratio to continue as the customer base, AUM and gross written premiums
rises increases.
Breakdown of General and Administrative Expenses
500
Expense ratio
Other
20%
9% CAGR
400
IT Expenses
17%
Marketing
Expenses
14%
18.9%
15.8% 13.9%
12.9%
300
200
100
Sales
Expenses
2024E
2023E
2022E
2021E
2020E
2019E
2018E
2017E
2016E
2015E
0
Sales
Personnel
Expenses
14.1%
11%
8.9%
8%
5%
2011
2012
2013
2014
1Q14
1Q15
42
June 17, 2015
RESEARCH
EMBEDDED VALUE (MCEV)
Market Consistent Embedded Value is a common valuation method
throughout Europa and Asia; however, only AvivaSA has been calculating
and MCEV metrics since 2008. MCEV is a set of DCF calculations, which
uses present value of future profits (value in force) and market value of net
assets to value the business today. Please note that, value deriving from
future new business is not included in the Embedded Value.
MCEV is a useful metric to understand the business structure and
valuation of the insurance companies due to insurance sector’s unique
business structure and cash flow stream. Profit and revenues occur at the
point of sale for most companies and profit immediately produces value for
companies. However, insurance contracts have longer maturities in nature
and profit occurs through the contracts’ lifespan. When a insurance
contract is sold; typically a cash outflow takes place due to high front up
expenses such as commissions, sales expenses, setting up administration
expenses and reserve and capital requirements.
Concepts:
Present Value of New Business Premiums: PVNBP is a metric in which
the values of single and regular premium new business sold during a
financial period can be combined to give a single sales number. It is the
sum of the value of single premiums and present value of regular
premiums.
Value of New Business (VNB): VNB is the present value of the projected
stream of expected profits emerging from the new business. A positive
VNB indicates that new business increases the value of the company.
New Business Margin: New Business Margin is a profit measure for life
insurance companies. It is calculated as VNB/PVNBP and indicates the
relevant segments’ profitability.
Net Worth: Net worth is past profits reported under Statutory financials.
Value In Force: Value In-Force is defined as the present value of expected
future earnings emerging from in-force business.
MCEV Evolution of AvivaSA
AvivaSA’s MCEV rose by 26% YoY in 2014. Increase was mainly driven
by Value In-Force book, indicating the growth in expected future earnings.
Looking at the details, pensions (both individual and group pensions)
constitute 86% of VIF, in which the majority of contribution derives from
individual pension segment. VIF pension segment in total rose by 29%
YoY in 2014.
43
June 17, 2015
RESEARCH
MCEV Evolution (2013-2014)
1,360
1,204
26%
1,190
124.0
955
1,020
0.8
10.3
103.8
850
23.6
1.2
680
765.4
590.7
510
340
91.5
112.0
157.5
178.2
FY2013
FY2014
170
0
VIF Life Protection
VIF Personal Accident
VIF Life Savings
VIF Individual Pension
VIF Group Pension
Net Worth
Source: The Company
Due to strong growth momentum in the private pension sector in 2014,
value of new business became the main driver in MCEV growth. Expected
profits deriving from existing business ranked number to in terms of MCEV
contribution. Operating variances reduced MCEV by TL34.2mn mainly due
to one-off costs, weak lapse experience of the credit linked business.
Although number of pension contracts was higher than expected, a
greater proportion of these halted contributions, which eventually had an
negative impact. Furthermore, lower TL rates on annual basis led to
positive contribution from economic variances.
MCEV Evolution (2013-2014)
1,400
99.1
-34.2
-12.1
1,200
1,000
800
-8.6
31.7
-25.4
53
125
198.5
52
26%
105
600
1026
400
798
200
0
MCEV FY13
VNB
Expected Existing
Operating Variances
Business Contribution
Op. Assumption
Change
Other operating
variances
Economic variances
Capital movements
MCEV FY14
Source: The Company
44
June 17, 2015
RESEARCH
1Q15 Results
AvivaSA announced its 1Q15 bottom line as TL16.8mn profit vs. TL6.1mn
in 4Q14 and TL11.5mn net profit in 1Q14. (in statutory financials)
Total technical profit of AvivaSA in 1Q15 realized at TL9.8mn from 2.2mn
loss in the previous quarter. The main driver of the growth in technical
income is life segment, in which technical income from life segment
realized at TL10.1mn in 1Q15 vs TL7mn in the previous quarter. In the
pensions segment, contributions from participants grew by 8.7% QoQ in
1Q15, which is higher than the sector average of 7.3% QoQ growth. As far
as the profitability of pension segment considered, AvivaSA booked
TL3.0mn loss in 1Q15, indicating TL5.4mn improvement QoQ (TL8.4mn
loss in 4Q14) On the other hand, net investment income increased by
24% QoQ and 39% YoY and came in at around TL12mn in 1Q15. Non life
technical profit realized at TL3mn in 1Q15 vs TL1mn loss in 4Q14. Please
note that non-life technical profit segment consists of personal accident
business.
Based on 1Q15 results, RoE realized at 40.3% in 1Q15, implying 9.8pp
improvement YoY.
1Q14 2Q14 3Q14 4Q14 1Q15 Chg.(QoQ) Chg.(YoY)
Life Gross Premiums
48
63
51
51
48
-6%
0%
62
72
69
63
73
17%
18%
-50
-59
-61
-56
-63
n.m.
n.m.
12
13
8
7
10
45%
-18%
-1
0
0
-1
3
n.m.
n.m.
36
42
43
47
51
8%
39%
-42
-46
-45
-56
-54
n.m.
n.m.
-6
-4
-1
-8
-3
n.m.
n.m.
5
9
6
-2
10
n.m.
81%
8
12
9
9
12
24%
39%
1
-1
2
0
2
425%
13%
Profit before tax
15
20
18
8
23
203%
51%
Tax
-4
-5
-5
-2
-6
n.m.
n.m.
Net Income
11
15
13
6
17
178%
47%
Growth (YoY)
1Q14
2Q14
Pension AUM
7.3%
19.6% 25.4% 42.0%
6.7%
-35.3 pp
-0.6 pp
Gross Premium Life (YoY)
-6.7%
0.9%
5.3%
6.2%
0.1%
-6.1 pp
6.7 pp
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
n.m.
81%
-1654.2 pp
459.9 pp
3Q14
4Q14
189% 1735%
1Q15 Chg.(QoQ) Chg.(YoY)
-379% 154%
Net Earnings
62.0% 25.6% 32.7% 49.3% 46.7%
-2.7 pp
-15.4 pp
ROE
30.4% 34.4% 33.4% 28.2% 40.3%
12.1 pp
9.8 pp
29.2% 24.9% 21.6% 19.7% 23.6%
3.9 pp
-5.6 pp
Leverage
43.6x
982.8 pp
1163.5 pp
42.8x
41.6x
45.4x
55.3x
45
June 17, 2015
RESEARCH
SUMMARY FINANCIALS (IFRS Financials)
2012
2013
2014
2015E
2016E
2017E
99
92
114
136
158
185
Life Protection Technical Profit
54
87
103
123
151
184
Life Savings Technical Profit
8
2
3
3
3
3
Personal Accident Technical Profit
12
14
15
17
21
25
172
195
236
279
333
397
General and Administrative Exp.
127
144
168
188
210
234
Total Technical Profit after G&A
45
51
68
91
123
163
Total Investment Income & Other
21
40
42
47
51
59
Profit Before Taxes
65
91
110
138
173
222
Tax expense
16
20
23
28
35
44
Net Earnings (IFRS)
49
72
87
110
139
177
Balance Sheet (TL mn)
2012
2013
2014
2015E
2016E
2017E
Cash and cash equivalents
299
315
394
468
556
668
Financial assets
410
346
358
421
573
750
Deferred expenses
99
149
205
216
225
234
Other assets
40
53
82
88
93
99
Total assets
848
863
1,040
1,194
1,446
1,751
Pension business payables
72
104
170
216
275
336
Insurance contract liabilities
472
410
433
551
674
820
Other liabilities
61
77
103
32
27
27
Total liabilities
605
591
706
799
976
1,183
Total shareholders' equity
242
272
334
394
471
568
Total equity and liabilities
848
863
1,040
1,194
1,446
1,751
2012
2013
2014
2015E
2016E
2017E
ROE
21.7%
27.9%
28.8%
30.3%
32.1%
34.1%
55.1%
58.5%
60.4%
61.5%
61.6%
61.6%
Leverage
3.5x
3.2x
3.1x
3.0x
3.1x
3.1x
Dividend Payout
68%
36%
46%
45%
45%
45%
46
RESEARCH
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
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Additionally, with respect to our statements above, all our claims and plea rights are covered in the
regulations which apply in the countries that this report has been sent to.
Garanti Securities
Etiler Mah. Tepecik Yolu
Demirkent Sokak No:1
34337 Besiktas, Istanbul / Turkey
Phone: +90 (212) 384-1155
Fax: +90 (212) 352-4240

RESEARCH

Transcription

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