The three UK insurance stocks to own in 2022

This leading City bank has tipped a number of insurance companies to do well over the next 12 months, but a few stand out, including one with an impressive dividend yield.

Aviva (LSE:AV.) shares have been backed to reach 500p for the first time since 2018 after a leading City bank named it as one of three top picks in European insurance in 2022.

The blue-chip stock currently trades at 428.45p, representing a 15% recovery from November's Omicron sell-off low, and equalling the best level since the onset of the pandemic.

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But Deutsche Bank believes there's further to go as one of three companies in European insurance offering an “attractive blend” of value and near to medium-term catalysts. The others are Allianz (XETRA:ALV) and Hannover Re (XETRA:HNR1).

Their selection comes at the start of what's likely to be a year of increased volatility for the sector, with the potential for periodic scares most notably around inflation.

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Deutsche Bank's overall forecasts imply a net positive outlook for insurers, with rising bond yields likely to increase the already comfortable view of balance sheets. However, earnings per share momentum is set to continue to lag both banks and the wider market.

The European sector currently trades on 11.5 times 2022 earnings, which is at the upper end of the long-term range, and with a dividend yield of 5.7%.

Elsewhere in Deutsche Bank's UK insurance coverage, Legal & General (LSE:LGEN) and Prudential (LSE:PRU) have “buy” recommendations with price targets of 335p and 1,680p respectively.

The City bank is hoping for a better year among UK life assurers after they proved to be “disappointingly dull performers” in 2021.

Aside from stock-specific issues, this reflected weaker-than-expected bulk purchase annuity volumes, a lack of progress on bond yields and the impact of political and economic headwinds.

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Deutsche Bank is hopeful the news flow will improve in 2022, with the prospect of a more determined rise in bond yields providing a benefit for UK annuity providers in terms of their solvency ratios and to the available yield on new investments.

It also eyes a recovery in the pipeline for bulk purchase annuity deals after volumes subsided from their 2019 peak of more than £40 billion to around £30 billion in 2020 and 2021.

There should also be some clearer stock-specific catalysts, which in the case of Aviva could be realised in March when annual results disclose a total sum for capital returns. The insurer raised £7.5 billion from selling eight businesses as part of a shift in focus towards its strongest and most strategically advantaged businesses in the UK, Ireland and Canada.

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Aviva boss Amanda Blanc is guiding the market towards a capital returns figure above £4 billion, but Deutsche Bank continues to forecast £5 billion and says from a solvency perspective a total of up to £5.9 billion could be justified.

Aviva rebased its 2020 dividend back to 21p a share, but the City bank sees scope for a 30.2p dividend in 2022 and 31.4p in 2023, which is 20% and 15% above consensus.

Assuming a £5 billion up-front capital return, the group trades with a free cash flow yield above 11% in 2023 compared with an average 8.1% for its peers. Deutsche Bank notes that a figure closer to 9% for Aviva implied a 25% potential upside for shares.