Zurich Insurance Group, a leading global insurance company, has significant cash and capital available to fund deals, according to industry analysts from investment bank Berenberg.
“We estimate Zurich has c$6 billion in excess capital that it could deploy, and this could provide a significant uplift to ROE.”
With significant cash and capital resources available, Zurich is keen on exceeding its 20% return on equity (ROE) target by 2025, the final year of its current three-year plan.
Zurich has revealed its plans to pursue potential acquisitions fueled by its excess capital and rising margins in non-life commercial lines, the analysts noted.
Zurich is experiencing increasing margins in its non-life business segment. The implementation of the new International Financial Reporting Standard 17 (IFRS 17) accounting standard has accelerated the recognition of underwriting profits, particularly in the face of rising interest rates.
This shift has been well-received by the company, indicating potential future reserve releases and positive implications for earnings.
Zurich also disclosed that it possesses a substantial amount of excess capital, albeit well below $10 billion. Analysts estimate the figure to be around $6 billion.
The company intends to utilise this excess capital to pursue strategic acquisitions in line with its established strategy and target hurdle rates. Notably, any deals closed before mid-2024 are expected to be accretive to earnings within the current strategic plan period, spanning from 2023 to 2025.
This provides a potential upside to the forecasted CHF43 earnings per share in 2025.
Furthermore, Zurich has provided its guidance for 2023, anticipating up to twice the target growth rate of 8% per annum in business operating profit.
Based on the previous year’s business operating profit of €6.4 billion, the projected guidance indicates a figure slightly below €7.4 billion. This new estimate, however, is approximately $100 million lower than previously anticipated, primarily influenced by a lower forecast in the life insurance sector.
The previous year’s results included a one-off gain of over $0.1 billion, contributing to the revised outlook.
The company has been actively focusing on improving margins in its non-life business, with reported pricing in commercial lines within North America increasing by 8% in the first quarter of 2023.
Additionally, Zurich expects claims inflation to moderate to 6%, presenting the potential for a 2-percentage point improvement in the combined ratio. To manage potential rise in volatility, the company has adopted measures such as increasing reinsurance coverage and avoiding natural catastrophe exposures.
A conservative approach to reserving has been adopted by Zurich, leveraging the benefits provided by the new IFRS 17 reporting.
By discounting future claims, the company realises a significant uplift in underwriting profit, especially in the current environment of relatively high interest rates. Notably, Zurich is utilising a portion of this opportunity to bolster reserves, which bodes well for medium-term earnings growth.
From a valuation perspective, Zurich currently trades at 11.5 times the 2024 consensus Bloomberg price-to-earnings ratio (P/E), slightly above its five-year average of 11.2 times.
Moreover, investors are attracted by the company’s compelling 5.9% yield, offering a promising investment opportunity.
