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Investing.com -- Bank of America (NYSE:BAC) (BofA) analysts recently downgraded several European insurance stocks, citing valuations that have reached peak multiples and diminishing prospects for positive earnings surprises.
The sector has seen a significant year-to-date increase of 21%, with valuation multiples hitting new highs. Despite the insurers’ strong performance and financial health, BofA foresees a potential shift in market dynamics that could lead to negative earnings per share (EPS) revisions.
The insurance sector has been a popular investment, as reflected in BofA’s Fund Manager Survey, with the sector trading at all-time-high price-to-earnings (PE) multiples.
However, BofA analysts believe that the current macroeconomic uncertainty has driven prices to levels where stocks may be considered expensive. The firm has recently moderated its stance, downgrading large-cap insurers such as Allianz (ETR:ALVG), Munich Reinsurance (ETR:MUVGn), and Zurich Insurance Group AG (SIX:ZURN).
On Thursday, BofA downgraded Phoenix Group Holdings PLC (LON:PHNX) to Neutral rating, citing limited upside after a 32% year-to-date gain and now seeing only 13% total return potential. BofA added that the stock’s yield is no longer notably higher than that of its peers.
European insurers have benefited from strong earnings momentum in recent years, driven by a favorable pricing cycle and higher investment income from increased yields.
However, BofA suggests that the beginning of a softer pricing phase and declining yields in Europe could reverse the trend of EPS upgrades that the sector has enjoyed.
The sector’s valuation has reached unprecedented levels, with BofA noting that such absolute and relative valuations have been sustained for less than 100 days since 2007. While the firm does not predict substantial downside risks, given the insurers’ robust condition, it does see limited room for further valuation growth.
In terms of capital returns, the insurance sector remains attractive, offering an average estimated dividend yield of 4.6% for 2025, plus a 1.5% buyback yield.
However, with 10-year bond yields at higher levels, the relative appeal may have diminished slightly. BofA also suggests that with slowing organic EPS momentum, some companies may turn their focus to mergers and acquisitions (M&A).
Despite a more cautious outlook for the sector overall, BofA identifies pockets of value, with top picks including Prudential (LON:PRU), Legal & General (LON:LGEN), and Beazley (LON:BEZG), which offer total return potentials ranging from 22% to 42%.
Nonetheless, with an average total return potential of only 10% across the sector, BofA maintains a balanced stance.