Admiral drops on BofA Merrill Lynch, HSBC downgrades

Bank of America Merrill Lynch downgraded Admiral to ‘underperform’ from ‘neutral’ as it took a look at the UK non-life insurance sector.

It said Admiral’s valuation has reached levels the bank genuinely struggles to justify, now trading at 18.1x forward earnings.

“We look at Admiral’s valuation in a number of different ways – relative to peers, relative to history, analysing the various different earnings streams – and all of them suggest to us the stock is overvalued,” said BofA Merrill.

The bank highlighted that its decision to downgrade does not reflect a negative view on the quality of the company.

“Indeed, it is consistent with our ratings on other high quality businesses which we think are overvalued, e.g. Hiscox.”

Merrill maintained its ‘buy’ rating on RSA Insurance, saying the level of its conviction in the recommendation is higher after the company’s full year update.

“We see an even better trajectory on underlying earnings than we had expected, a better solvency ratio, and we think the market has yet to reward the company with an upward rerating.”

The bank kept its ‘neutral’ rating on Direct Line Group, saying the stock’s multiple was broadly fair, the cost-cutting story is well advanced and capital returns this year are likely to be lower than previously expected.

Still, it said the yield remains attractive at 7% near term. “Of the UK non-life companies we cover, it would be our preferred pick for defensive yield.”

HSBC downgraded Admiral to ‘hold’ from ‘buy’ following the strong share price performance and amid limited upside.

It pointed out that Admiral shares are up 14% year-to-date and have outperformed the FTSE 100 and DJ Stoxx insurance index by 18% and 29% respectively.

Still, it said the fundamentals of the business remain strong, with an attractive total dividend yield of 7% and a strong capital position.

The bank lifted its price target on Admiral to 1,930p from 1,748p.

At 0948 GMT, Admiral shares were down 2.3% to 1,871p.