Investing.com -- Shares of Zurich Insurance Group (SIX:ZURN) fell on Thursday following a downgrade by UBS analysts, who revised the stock's rating to "sell" from "neutral."
This adjustment reflects UBS's concerns over the company's valuation, debt leverage, and sensitivity to interest rate changes, as detailed in their comprehensive research report.
The downgrade comes amidst what UBS described as an overvaluation of Zurich Insurance’s shares, which are trading at a 30% premium to their historical five-year average P/E ratio and 20% above the European insurance sector's typical level.
The brokerage argues that this high valuation leaves limited room for further appreciation, especially with the company already nearing peak historical multiples.
UBS reduced its price target for Zurich shares by 3% to CHF 515, citing foreign exchange factors as a contributing reason.
UBS's skepticism centers on Zurich’s heavy reliance on commercial lines, which represent approximately 75% of its business.
The analysts suggest that pricing in this sector is likely to lag inflation by late 2025, reducing profitability. This view contrasts with their more favorable outlook on retail and reinsurance pricing.
They also noted that Zurich's projected earnings per share growth assumes optimistic margin improvements, which may not materialize in the current economic climate.
Interest rate sensitivity is another headwind, as per UBS. A potential 100 basis points reduction in interest rates could cut Zurich's solvency ratio and reduce 2025 earnings by about 5%.
Additionally, Zurich's higher debt leverage—estimated at 29%—could restrict its capacity for shareholder returns, such as dividends and buybacks, compared to competitors like Swiss Re (OTC:SSREY), which offers a more attractive yield.