ANADOLU SIGORTA (ANSGR.IS) COMPANY UPDATE. Outperform Current / 2007-end Target Price:YTL2.96/4.50

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1 COMPANY UPDATE Outperform Current / 2007-end Target Price:YTL2.96/4.50 YTL STOCK MARKET DATA (18 April 2007) Relative Performance 1 mth 3 mths 12 mths -3.6% 11.4% -9.6% 52 Week Range (YTL): Market Cap (mnytl): 592 Average Daily Vol (US$mn) 3 mths: 13.9 YTD US$ Return (%): 33.1 Shares Outstanding (mn): 200 Free Float: 48% mn YTL / /06 03/06 Shareholding Structure Türkiye Is Bankası 35.53% Milli Reasurans 21.78% Other 42.69% FIGURES & FORECASTS Earned Premium (YTLmn) Anadolu Sigorta ( ) 04/06 ANSGR 05/06 07/06 08/06 09/06 10/06 Premiums 11/ E 2008E Technical Profit (YTLmn) 01/07 02/07 03/07 Relative to ISE (rhs) Net Profit (YTLmn) Anadolu Sigorta, the leading player in the Turkish non-life insurance market with a 13.2% market share, presents investors with an attractive opportunity to gain exposure to the expected growth in the Turkish insurance market. Trading at the cheapest multiples of all the publicly listed insurance stocks, Anadolu Sigorta stands out with its untapped top line and earnings growth potential. Therefore, we reiterate our OUTPERFORM rating for Anadolu Sigorta with YTL4.50 price target. The Isbank branch network presents a clear competitive advantage, which has not yet been fully utilized. Anadolu Sigorta only generates 15% of its total premiums from Isbank s extensive branch network, despite its organic ties with the bank, which is Turkey s largest bank. One of the company s major strategies is to increase its premium generation from Isbank by locating its own sales force in branches in rotation. We believe this will not only bolster Anadolu Sigorta s top line but also improve its profitability, as bank customers are known to have better risk profiles set to be a better year in terms of operational performance. Anadolu Sigorta generates 21.4% of its premiums from fire branch, generally, one of the most profitable branches with a low claims ratio. However, the large scale fire at Trakya Cam in 2006 resulted in a fall in technical profit. We expect an improvement in technical profitability in Valuations of recent insurance sector M&A deals raise prospects of a re-rating in the industry. The stake sales in Genel Sigorta, Ray Sigorta, Garanti Sigorta, and Garanti Emeklilik at high valuations, and Ak Emeklilik s merger with Aviva clearly indicate that global insurance companies expect to see high growth rates in the Turkish insurance market going forward, which is also likely to give rise to a re-rating of the insurance stocks currently trading on the ISE. Anadolu Sigorta is not an immediate acquisition target, but with its high market share and cheap valuation, the Company would benefit considerably from such a re-rating of the industry. Anadolu Sigorta s 20% stake in Anadolu Life presents a hidden asset. The recent valuation of Garanti Life and Pension Company s stake sale indicate that a re-rating in life insurance companies may also contribute to Anadolu Sigorta s valuation. Combined Ratio (%) P/E P/BV P*/Premium % % E % E 1, % P*: Adjusted price for participation portfolio Research: +90 (212) Sales: +90 (212)

2 INVESTMENT CASE Anadolu Sigorta boasts a rich participation portfolio with the value of its stakes from listed participations reaching YTL276mn. Applying a 20% holding discount to this portfolio, and including the YTL5mn book value of unlisted participations, we reach a total participation value of YTL226mn for Anadolu Sigorta. Therefore, when adjusted for this large participation portfolio, the company s current market cap prices in each 1% of the company s market share at a mere YTL28mn, suggesting an adjusted Price/ Earned Premium multiple of 0.5x (or an Adj. Price/ Premiums multiple of 0.3x), looking very cheap when compared to both the trading multiples of the listed peers and the multiples seen in recent M&A transactions. Anadolu Sigorta is also trading at a deep discount to its peers in terms of its P/BV and P/E multiples. Domestic Comparison for Listed Insurance Companies Company Ticker Price (YTL) Mcap (YTL) P/BV P*/Premiums Earned P/Earnings P* per 1% Market Share Aksigorta AKGRT Anadolu Hayat ANHYT Anadolu Sigorta ANSGR Aviva Sigorta AVIVA Gunes Sigorta GUSGR Ray Sigorta RAYSG Yapı Kredi Sigorta YKSGR P*: Adjusted price for participation portfolio Summary of Recent Insurance Deal Multiples Stake Value of Market Value of 1% Implied Company Buyer Seller sold Stake Share m.share (mn YTL) P/BV Genel Sigorta Mapfre Cukurova 80.0% 285mn 3.34% n.a.* 1.4 Ray Sigorta TBIH Dogan 58.2% $81.5mn 3.28% Garanti Sigorta Eureko BV GarantiBank 80.0% 365mn 4.54% Garanti Emeklilik Eureko BV GarantiBank 15.0% 100mn 6.07% * n.a due to insufficient information on subsidiaries of Genel Sigorta Part of these discounts can be attributed to the fact that Anadolu Sigorta is not an immediate acquisition target as the main shareholder of the Company, Is Bank, is not inclined to sell its insurance business at the moment. However, we would strongly argue that this does not justify the full extent of the discount applied to the Company. We have to underline that the companies with deal expectations are only trading at higher multiples because the deals are expected to take place at high valuations, and that strategic buyers are only willing to offer such high valuations because of the strong growth potential in the sector. Anadolu Sigorta, the leading player in the Turkish insurance market with its 13.2% market share and massive distribution network of 1,304 agencies and 866 Isbank branches, is one of the best positioned Companies to benefit from the expected growth in the sector. Note that the total non-life premiums to GNP ratio of Turkey stands at 1.4%, still denoting an underpenetrated nature when compared to the 2.4% ratio in Eastern Europe. We believe that the ongoing M&A deals will result in a re-rating of the Turkish insurance market, similar to what has been seen in the banking sector. Anadolu Sigorta will be affected very positively from such a re-rating. 2

3 VALUATION We value Anadolu Sigorta s insurance business at 1x Adj. P/Earned Premium multiple (or 0.6x Adj.P/Premium multiple), which suggests YTL683mn for the core business of the Company. Adding total participation value of YTL226mn after discounting the total value of listed participation portfolio by 20%, we reach a net asset value of YTL909mn for the Company. We set our target price at YTL4.5 vs. the current price of YTL2.96, which indicates 53% upside potential. Anadolu Sigorta NAV Valuation Method Mcap (mnytl) or Valuation Multiple (x) Anadolu Sig. Stake Current NAV (mnytl) % of Total NAV Listed Participations Is REIT Current Mcap 1, % 50 5% TSKB Current Mcap % 8 1% Is Inv. Trust Current Mcap % 0 0% Is Leasing Current Mcap % 0 0% TSKB Inv. Trust Current Mcap % 0 0% Is Risk Venture Current Mcap % 6 1% Anadolu Life and Pension Co. Current Mcap 1, % % Is Bank Current Mcap 19, % 0 0% Total Listed Participations % Holding discount on total listed participations 20% 0% Total Listed Participations (with discount) % Unlisted Participations Various small participations Total Book Value 5 5 1% Total Unlisted Participations 5 1% Total Participations (Listed with discount+unlisted) % Core Insurance Business Adj.P /E.Premium % Total NAV % Current Mcap of Anadolu Sigorta 592 Target Mcap % Upside/Downside to Current Mcap 53% Note: All current market caps as of 18 April

4 We believe that we are fairly conservative in our valuation as we have used the current market values of Anadolu Sigorta s participations in our net asset value calculation, rather than their target values. Being mostly active in non-bank financial sectors, these participations are also likely to gain value on the back of economic growth and re-ratings in their respective industries. Most notably, Anadolu Life and Private Pension Company, which accounts for 77% of Anadolu Sigorta s listed participation portfolio, is also likely to be re-rated in the near future in terms of its market share, as M&A deals continue to set benchmarks for this infant industry. Please recall that GarantiBank agreed to sell a 15% stake in the Garanti Life and Private Pension company to Eureka on 21 March for 100mn. The deal values the whole company at 667mn (YTL1,233mn). As of FY06, Garanti Life and Private Pension had a market share of 6.07% in the life insurance market. Thus, the deal values each 1% of market share of the company at YTL203mn. A similar pricing method implies a valuation of YTL4,263mn for Anadolu Hayat Sigorta thanks to its 20.98% market share in the life branch, while the current mcap we have used in our NAV calculation for Anadolu Sigorta is just YTL1,059mn. The stake at Anadolu Hayat Sigorta, the leader Company in life branch, should be considered as a hidden asset for Anadolu Sigorta. The Implication of Garanti Life and Private Pension Deal Implied value for ANHYT (Anadolu Life and Pension Co.) 4263 Implied value for ANSGR's 20% stake at ANHYT 853 Additional value to ANSGR's NAV 513 ANSGR's implied NAV 1421 Upside to current Mcap 140% In addition, Anadolu Sigorta is currently buttressed by a net cash position of YTL114mn in the widest sense of the net cash definition. Leaving aside the theoretical yet-to-beconcluded discourse on the inclusion of net cash/debt of an insurance Company in its net asset value calculation, we have left this amount out of the calculation for the time being, in the interests of adopting a conservative approach. However, its strong cash surplus should also be considered as a plus in terms of the valuation of the Company. 4

5 THE COMPANY Anadolu Sigorta has been the leading player in the non-life segment of the Turkish insurance market since 2002, in terms of premium production. Anadolu Sigorta s market share reached 13.2% in 2006 in the non-life segment, where there are currently 24 active companies. Market Shares of Non-life Insurance Companies (2006) (%) ANADOLU AXA OYAK KOC ALLIANZ AK SIGORTA YAPI KREDI ERGO ISVICRE GUNES BASAK GARANTİ (*) T.GENEL RAY FINANS GUVEN ANKARA (*) AVIVA SEKER AIG TEB HDI BIRLIK ISIK GENERALI HUR TOPRAK (*) Source: Insurance association (*) Estimated by Insurance association In 2006, Anadolu Sigorta set a new milestone to become the the first Company in the sector to pass the YTL1bn mark in premium production. Anadolu Sigorta s total premium production reached YTL1,060mn, with a 28.4% YoY increase, while the total premium production in the sector increased by 26.2% YoY to YTL8,007mn. The Company generated 86% of its total premiums from the accident, fire, and health branches in 2006, in line with the general sectoral dynamics. Premiums by Branches (2006) ANADOLU SIGORTA NON-LIFE INSURANCE MARKET Premiums Share in YoY Premiums Share YoY Product (mn YTL) Total (mn YTL) in Total Accident % 29.7% 4, % 22.2% Fire % 34.8% 1, % 39.6% Health % 9.3% % 24.5% Marine % 23.1% % 19.3% Engineering % 50.2% % 34.4% Personal Accident % 25.1% % 28.0% Legal Protection 4 0.4% 11.2% % 22.0% Credit 1 0.1% 110.6% 8 0.1% 85.4% Agriculture 0 0.0% 110.2% % 11.9% Total 1, % 28.4% 8, % 26.2% Source: Anadolu Sigorta annual report. Accident branch includes Motor Third Party Liability branch figures. 5

6 The accident branch remained a loss making branch for Anadolu Sigorta and the sector as a whole, particularly due to car insurance and the motor third party liability branch. The market is striving to alleviate the problem by both rationalizing pricing and improve its claims management. However, the fierce competitive environment may hinder any immediate progress towards better pricing schemes, while claims management is more promising in terms of beneficial results. In addition to the deterioration of technical profitability in accident branches, Anadolu Sigorta s 2006 technical profit was also hit by the large fire at Trakya Cam. Nevertheless, the fire branch is generally a profitable branch with a low claims ratio, where Anadolu Sigorta enjoys a leading position with its 14.3% market share. In 2007, the fire branch is likely to contribute more strongly to Anadolu Sigorta s technical profitability. Note too that the fall in technical profit from the fire branch was partly compensated by a reversal of loss from the health branch to a healthy profit in With its successful claims management, Anadolu Sigorta is also determined to remain profitable in the health branch. Other branches with better technical profitability prospects are the marine, agriculture, legal protection, personal accident and credit branches, yet the premium generation from these branches remains quite limited. As legal infrastructure develops and economic growth continues in parallel with EU convergence, premium generation from these branches is likely to increase. Gross Technical Profits by Branches (mn YTL) 2005 YoY 2006 Fire % Personal Accident % Marine % Health n.m Engineering % Legal Protection % Agriculture % Credit % Motor Third Party Liability n.m Accident n.m Total % An analysis of the breakdown of the costs on the technical side reveals that net commissions to agencies, totalling YTL97.3mn in 2006, is Anadolu Sigorta s single largest operating expense item, and is accounted for at the gross technical profit level. It is followed by the YTL68.8mn in general expenses. Personnel expenses account for YTL32.5mn of this amount, followed by YTL 24.3mn for general administrative expenses and YTL11.9mn for marketing expenses. With the amendment to accounting policies, insurance companies can now book part of their investment income under technical income (YTL27.6mn in 2006). Anadolu Sigorta realized a net technical loss of YTL15.5mn in

7 Net Technical Profit by Branch (mn YTL) YoY Personal Accidnt % Marine % Fire % Legal Protection % Engineering % Health n.m Agriculture % Credit % Motor Third Party Liability n.m. Accident n.m. Total n.m OUTLOOK We expect Anadolu Sigorta to raise its premiums by 20% in 2007 to YTL1,279mn. We factor in a conservative growth rate as we expect the ongoing M&A frenzy in the market to motivate smaller players to grab market share to reach better valuations on deals. Nevertheless, a substantial upside challenge remains on our premiums growth assumption. We believe that better utilization of Is Bank s branch network would enable Anadolu Sigorta to tackle increased competition in the insurance market following new foreign entries in 2006 and We expect Anadolu Sigorta s premiums to grow by 25% in 2008 and pass the YTL1.5bn threshold. In terms of profitability, we expect INCOME STATEMENT I-TECHNICAL PART A-Non-Life Technical Income Total Premiums 1-E. Premiums (Net of Reinsurer) 2- Investment Income 3- Other Technical Income (Net) , E 876 1, E 1,095 1,590 1, Anadolu Sigorta to in- crease its profitability in the fire, health, engineering and marine branches. In 2007, we forecast the company to reach a technical profit of YTL21mn, similar to the level in Note that the B-Non-Life Technical Expense (-) ,063 large fire at Trakya Cam 1-Total Claims (Net of Reinsurer) squeezed profitability in Ch. in Bonus and Dis.Provisions (Net) Ch. in Other Technical Reserves (Net) Operating Expenses (-) C-Non Life Technical Profit (A-B) II-NON TECHNICAL PART D-Investment Income E-Investment Expenses (-) F-Other Income and Expenses (+/-) Net Profit (Loss) A)Conservation Ratio 70% 73% 70% 70% B)Loss-Premium Ratio -78% -81% -77% -76% C)Cost Ratio -18% -17% -17% -17% D)Combined Ratio -95% -98% -94% -93% With this improvement, we expect a fall in the combined ratio of the Company from 98% in 2006 to 94% in We expect profitability to improve further in 2008 on the back of the increase in the share of premiums generated out of the bank branches. Bank clients have better risk profiles, due to intensive data keeping and banks credit scoring systems. We expect profitability to improve by a further 1 p.p. in 2008, with Anadolu Sigorta reaching a technical profit of YTL32mn. 7

8 ANADOLU SIGORTA - SUMMARY FINANCIAL TABLES Balance Sheet 4Q05 1Q06 2Q06 3Q06 4Q06 QoQ (%) YoY (%) YoY (%) I-CURRENT ASSETS Cash and Equivalents % 54% % Financial Investments % 3% % Short Term Receivables % 22% % I- Total Current Assets % 23% % II-LONG TERM ASSETS Long Term Financial Assets % 12% % Marketable Securities % -3% % Participations % 18% % II- Total Long-Term Assets % 10% % TOTAL ASSETS 1,028 1,078 1,054 1,122 1,229 10% 20% 1,028 1,229 20% III- SHORT TERM LIABILITIES Short Term Payables % 20% % Technical Reserves % 37% % Reserves for Unearned Pr.-net % 36% % Reserves for Outst. Cl.-net % 40% % III- Total Short Term Liabilities % 31% % IV- LONG TERM LIABILITIES Total Long-Term Liabilities % 17% % V- SHAREHOLDERS EQUITY Paid in Capital % 29% % Total Equity % 9% % TOTAL LIABILITIES 1,028 1,078 1,054 1,122 1,229 10% 20% 1,028 1,229 20% INCOME STATEMENT 4Q05 1Q06 2Q06 3Q06 4Q06 QoQ (%) YoY (%) YoY (%) I-TECHNICAL PART A-Non-Life Technical Income % 14% % Total Premiums % 25% 826 1,060 28% 1-E. Premiums (Net of Reinsurer) % 29% % 1.1- Premiums (Net of Reinsurer) % 28% % 1.2- in Unearned Premium Pr n.m. n.m n.m s in Current Risk Provison n.m. n.m. 0 0 n.m. 2- Investment Income Transfers from % 58% % 3- Other Technical Income (Net of Tra % -86% % B-Non-Life Technical Expense (-) n.m. n.m n.m. 1-Total Claims (Net of Reinsurer) n.m. n.m n.m Claims Paid (Net of Reinsurer) n.m. n.m n.m s in Outstanding Claims P n.m. n.m n.m. 2- s in Bonus and Discount Pr n.m. n.m. 0 0 n.m. 3- s in Other Technical Reserv n.m. n.m n.m. 4-Operating Expenses (-) n.m. n.m n.m. C-Non Life Technical Profit (A-B) n.m. n.m n.m. II-NON TECHNICAL PART D-Investment Income % 19% % E-Investment Expenses (-) n.m. n.m n.m. F-Other Income and Expenses (+/-) n.m. n.m n.m. G-Net Profit (Loss) % -53% % 8

9 Garanti Securities Garanti Building Nispetiye Mah. Aytar Cad. No.2/ Levent Istanbul Turkey ICM Contact Information: Alev Bosut: Omer Tanacan: Facsimile: 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. This document is not a solicitation to buy or sell any of the securities mentioned. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change 9 without notice. This report is to be distributed to professional emerging markets investors only.