The undervalued insurance stocks about to come back into vogue
As key players prepare to publish results, this analyst runs through the UK insurers it thinks will generate capital gains and pay big dividends in 2025.
4th February 2025 15:33
by Graeme Evans from interactive investor
A focus on “heavily undervalued” UK insurers has named Aviva (LSE:AV.) and Prudential (LSE:PRU) as top picks as the sector prepares to announce more attractive dividends and buybacks.
Bank of America’s preview of the industry’s 2024 results season highlights nine Buy recommendations in total, with others including Legal & General Group (LSE:LGEN) and Beazley (LSE:BEZ).
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It believes that UK insurers' average forecast 2025 capital return yield of 8.7% - encompassing dividends plus buybacks - will help stem three years of underperformance.
UK insurers lagged the FTSE All-Share index by 10% and UK banks by 38% during 2024 as the sector’s attractive yield has been made relatively less appealing in a high bond yield environment.
The yield is highest at 9% among UK life insurers, where stocks are trading on nine times 2026 earnings despite forecast 10% growth in earnings per share.
The bank said: “We expect UK Life to come back into vogue as the yield curve normalises, but recent UK and global economic conditions mean that this could take time. Until then, investors should still be paid handsome yields to wait for re-rating.”
The bank has forecast a solid set of results from UK insurers, with the attractive capital returns likely to include 5% growth in the Legal & General dividend and topped up by buybacks totalling £500 million. It trades with a dividend yield of 9% ahead of annual results on 12 March.
For Aviva, the bank expects a 35.91p per share final dividend. That’s a 7.5% rise year-on-year, with the increase in the cash cost of 6% within Aviva’s mid-single digit guidance.
The proposed Direct Line Insurance Group (LSE:DLG) acquisition means Aviva will not declare a buyback during 2025 but any steer on the potential level of returns from 2026 could be supportive.
The bank thinks the addition of Direct Line will be 13% accretive to Aviva's earnings per share by 2028, stronger than Aviva's own 10% guidance as cost and capital synergies surprise.
The deal gives Aviva a business mix similar to European composite peers, culminating in one of the most attractive yield profiles in the sector over the coming three years.
The bank added: “Even leaving aside the Direct Line acquisition, we think Aviva can positively surprise just by hitting its targets within its Life & Health division.”
Aviva, which is due to report results on 27 February, has a price target of 590p as one of Bank of America’s top picks.
The other is Prudential, which has been out of favour as Chinese sentiment weighed on Asian-exposed names. However, Bank of America points out that mainland China is only 7% of Prudential’s business and the company is set to show structural growth in its key markets over 2025.
It is also set to repurchase around 10% of its market capitalisation over the coming year, underpinning a big upside in the bank’s price target to 1000p ahead of results on 19 March.
The other Buy recommendations are Legal & General with a price target of 255p, while among the Lloyd’s of London insurers Beazley is at 1,000p, Hiscox Ltd (LSE:HSX) at 1,300p and Lancashire Holdings Ltd (LSE:LRE) at 820p. High-yielding M&G Ordinary Shares (LSE:MNG) and Phoenix Group Holdings (LSE:PHNX) have price targets of 230p and 545p.
The other Buy recommendation is car insurer Admiral Group (LSE:ADM), which has a price target of 3,000p.
It is forecast to report a sharp improvement in profitability on 6 March amid the benefits of 2023 and 2024's price rises alongside a jump in the underwriting result. The total dividend is set to rise 48% to 153p a share.
The bank said: “Admiral has demonstrated excellent cycle management over many years. However, inflation in the UK is proving to be stickier and price decreases could lead to a challenging market dynamic near-term.”
It adds that Admiral's cost base remains market-leading, potentially allaying fears over the impact of Aviva's proposed acquisition of Direct Line on the competitive landscape.
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