Establishing Global Life Protection Unit Will Exploit Future Opportunities

Key Takeaways

• Zurich Insurance Group is enhancing growth in Life and P&C segments through strategic units and rate increases, driving profitability.
  
• Focus on sustainable growth in Farmers Exchanges and strategic investments promises improved earnings, capital efficiency, and shareholder value.
  
• Increasing climate-related claims, regulatory rate constraints, and growth challenges in the Farmers segment may jeopardize Zurich's financial stability and shareholder satisfaction.

Catalysts

Provides insurance products and related services in Europe, the Middle East, Africa, North America, Latin America, and the Asia Pacific.

• Zurich Insurance Group has established a global life protection unit to exploit growth opportunities in the Life segment, particularly in protection, which drives approximately 60% of Life profits. This initiative is expected to enhance revenue growth in the Life segment.
  
• The Property and Casualty (P&C) business is projected to continue its strong performance, with anticipated rate increases in retail and commercial sectors, particularly in North America and EMEA. This positive rate momentum is expected to improve net margins by maintaining profitability amidst loss trends.
  
• Farmers Exchanges are focusing on measures to achieve sustainable growth, aiming to return to policy-in-force (PIF) growth by the second half of the year, which should boost top-line growth and potentially improve earnings over time.
  
• Zurich's disciplined reserving approach and strong capitalization (252% SST ratio at year-end 2024) position the company to allocate capital efficiently to high-return opportunities, supporting higher net margins and bolstering earnings through strategic investments.
  
• The compounded annual growth rate target of 9% in core EPS over the next three years highlights Zurich's commitment to enhancing shareholder value through increased earnings, reflecting the positive impact of its growth and profitability initiatives.

Zurich Insurance Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zurich Insurance Group's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 11.1% in 3 years time.
• Analysts expect earnings to reach $7.7 billion (and earnings per share of $53.96) by about February 2028, up from $5.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, down from 15.8x today. This future PE is lower than the current PE for the GB Insurance industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.06%, as per the Simply Wall St company report.

Zurich Insurance Group Future Earnings Per Share Growth

Risks

• The financial impact of the California wildfires, estimated at $200 million including Farmers Re, highlights the risk of increased claims costs and potential future volatility in Zurich's Property & Casualty earnings.
  
• Challenges in achieving Farmers' top line growth targets and the slow pace of returning to Policy in Force (PIF) growth could pressure overall revenue and affect Zurich's ability to meet its business operating profit (BOP) expectations.
  
• The reliance on rate increases to drive growth in the Property & Casualty and Farmers segments suggests that any regulatory or market resistance to further rate increases could limit revenue growth and impact net margins.
  
• Environmental changes, such as the increasing frequency of secondary perils like wildfires, could elevate reinsurance costs and reduce profitability, impacting Zurich's combined ratio and overall financial stability.
  
• The potential mismatch in consensus expectations for Zurich’s Property & Casualty segment growth compared to management's expectations indicates uncertainty in revenue forecasts, which could lead to shareholder dissatisfaction if targets are not met.

Valuation

• The analysts have a consensus price target of CHF541.623 for Zurich Insurance Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF625.0, and the most bearish reporting a price target of just CHF430.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $69.1 billion, earnings will come to $7.7 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 4.1%.
  
• Given the current share price of CHF578.0, the analyst price target of CHF541.62 is 6.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.