Shorting European Insurers - TheStreet

Shorting European Insurers

Swiss Life holding and Allianz, two stocks that have had a big move lately, are short candidates.
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ZUG, Switzerland ( -- Amazing how we have seen company valuations go from dirt cheap to stupidly overpriced, in a matter of just a few months.

While no one contests that the market's first leg up from its March lows was necessary and logical, what is happening now is too much too fast. In March, price levels had nothing to do with fundamentals and more to do with the hysterical state of investor sentiment.

Leverage had been sucked out, and forced selling had pushed valuations of many good companies to below tangible book value. This current rally has panic-buying written all over it.

From my European perspective, I'd like to point out insurance as a sector with some outstanding short opportunities. While U.S. insurers like

Met Life

(MET) - Get Report



(LNC) - Get Report

have addressed their capital issues, the situation in Europe is different.

A perfect example of mismanaged high-beta junk is

Swiss Life Holding

, whose shares are up 120% from their March lows. German insurance giant



, up 50% from its lows, has excellent management and fewer strategic issues, but the market is underestimating the tough fundamentals it faces. Both stocks make excellent short opportunities.

Investors have been pushing up valuations on companies with structural and strategic issues that have yet to prove earnings momentum is anywhere near turning.

In fact, rising bond yields will pressure shareholder equity and solvency ratios, forcing some of the weaker companies into capital raising measures. Allianz has had to inject $1 billion into its U.S. life unit to avoid ratings agency downgrades. The company is adamant that capital constraints aren't an issue, but the outlook for pricing in the property and casualty market is bleak. Very soon the market will ask itself again if there isn't the need to raise capital after all.

In much acuter need for a capital increase is Swiss Life. The company has been fighting it off by using some interesting accounting techniques (reclassifying debt as assets for example). Many investors have flocked to Swiss Life after their screening tools showed them a stock trading on a very low price-to-book valuation.

Anyone following the story more closely is aware that there is good reason for that, though. Swiss Life is also still in the process of untangling a mess it got itself into by making a hostile bid for Germany's


and will likely have to take sizable goodwill writedown on an other recent acquisition.

Being the pro-cyclical animal that it is, Swiss Life brought down its equity exposures at the low, to close to zero. This positions them perfectly to have missed out on the recent market gains. Exposure to a weak German life insurance market and other issues will see the share rerate.

Allianz provides us with a Q2 update on August 7th while Swiss Life Q2 results are out on August 26th, we hope they prove us wrong.

-- Written by Dan Scott in Zug, Switzerland


Dan Scott is an independent equity adviser to institutional investors. Scott has been focused on European equities since 1999 when he was Dow Jones & Co.'s (Dow Jones Newsires, The Wall Street Journal, Barron's etc.) automotive industry correspondent, based in Frankfurt, Germany. Together with his time at Dow Jones & Co and later as CNBC's chief correspondent in Frankfurt and then in Zurich, Scott has collected a strong network of contacts and a solid understanding of European equities. Since 2008, Scott has been advising institutional investors (including hedge funds, pension funds and family offices) on their European holdings, first for Kepler Capital Markets and more recently for his own company, Scott & Associates AG based in Zug, Switzerland.