Deutsche Bank names Aviva alongside Prudential (LSE:PRU), Direct Line Insurance Group (LSE:DLG) and Legal & General Group (LSE:LGEN) as having potential for re-rating over the next 12 months or where the shares have been oversold.
It notes that economic uncertainty and the switch to the IFRS 17 accounting standard has weighed on the sector, creating some attractive valuation multiples and an average 2025 total capital return yield of 7.4%.
Within the UK life sector, it highlights Aviva’s total forward yield of 12.3% as the FTSE 100 company’s dividend payments and an estimated £300 million a year of share buybacks look sustainable against cash and capital generation.
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Deutsche Bank said: “We believe Aviva currently has the most clear (and believable) framework - which we think should allow it to trade at a premium to peers.
“Whilst it is still early days, we see the group positioning itself as the 'Allianz' of the UK insurers - where it returns a sustainable amount of excess capital to shareholders each year after considering organic and inorganic needs.”
Today’s note adds that the Legal & General will be a stock to watch once António Simões takes over from long-time chief executive Sir Nigel Wilson at the start of next year.
Deutsche Bank speculates whether a new capital management approach could see the group tame its bulk annuity growth expectations, instead deploying some of its excess capital to its investment management arm alongside greater returns to shareholders.
For now, the bank retains its “hold” recommendation on L&G but with a 41% upside in its price target to 290p and projected 2025 total capital return yield of 10.9%. Aviva, meanwhile, continues to have a 495p target price and “buy” rating.
While several UK insurance names have been trading at the cheaper end of their historical ranges, investors are being warned not to expect major catalysts until full-year results and strategy updates in the first part of 2024.
The chancellor's Autumn Statement is due next month but Deutsche Bank believes limited fiscal headroom will make this less impactful for the sector than in the past. On a brighter note, the bank’s economists are mildly more positive than expected on the 2024 outlook.
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In non-life insurance, the bank believes Direct Line shares are deeply oversold after axing its dividend last year and could see a substantive re-rating in 2024 as price rises begin to be felt.
Much will depend on the strategy of incoming chief executive Adam Winslow, who the car insurer recently hired from Aviva’s UK and Ireland general insurance arm.
Deutsche Bank currently has a “hold” recommendation and 170p price target, adding that improved earnings momentum has already been captured in the shares of rival Admiral Group (LSE:ADM).
The other “buy” rating in the bank’s UK coverage is Prudential, which trades on 10 times forward earnings for a wider-than-usual 35% discount to peer AIA.
The valuation gap reflects significant concerns around the China economy but limited exposure to real estate means the bank thinks balance sheet concerns are overdone. Its target on Pru shares is 1,430p, representing a 75% upside.
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