What the City thinks of L&G and Aviva shares right now

Price targets for Buy-rated Legal & General Group (LSE:LGEN) and Aviva (LSE:AV.) have been lifted by a City bank after its analysts looked at the impact of management actions on shareholder returns.

UBS’s top pick within the income-focused sector of UK life insurance continues to be Aviva, having upgraded from 555p to 580p for potential upside of 18.5% based on today’s price.

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L&G shares have fallen 7% this year after June’s strategy presentation by new boss Antonio Simoes tempered some of the loftier income expectations of City investors.

However, UBS describes the valuation as compelling with the risk-reward skewed to the upside.

It notes that a current price near 230p offers a 2025 projected all-in yield of 11.1% when taking into account both dividends and buybacks, versus the European insurance average of 7.8%.

Switching to a Buy stance, UBS lifted its price target from 240p to 260p and said that it now has equal preference for L&G as third UK life insurance pick of Phoenix Group Holdings (LSE:PHNX).

This week’s upgrade for L&G is driven by a consensus-beating view on the benefit of management actions — £350 million a year versus company guidance of £200 million.

Such a figure would lead to higher-than-expected operating capital generation (OCG) of £6.4 billion over the three-year period to 2027. OCG is the main earnings metric for UK life insurers and one that drives shareholder capital returns.

Typical sources of management actions include asset and liability optimisation and cost savings, with the majority being generated through insurers’ annuity businesses.

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UBS sees downside risk to Phoenix's long-term management action expectations of £400 million a year, with Aviva forecast to achieve £250 million compared with £200 million guidance.

The UK life sub sector currently trades with a 2025 total capital return yield of 10.4%. This includes Aviva’s forward dividend yield of 7.9%, which is supplemented by an excess shareholder return yield of 2.2%. Phoenix shares yield dividend income of 10.4%, with L&G’s 9.6% accompanied by 1.5% from excess returns.

Looking ahead, UBS adds that lower short-term interest rates should be positive for UK life insurers as they have the potential to diminish asset risk concerns.

UBS is currently looking for 175 basis points (bp) of interest rate cuts by the Bank of England in 2025, a more bullish projection than the City’s current 100bp forecast.

It adds: “We see a normalisation of the yield curve as an ideal scenario for the UK life insurers, with L&G the most geared to greater-than-expected interest rate cuts.”

Exposure to market risks remains a concern for L&G, but the bank believes a high solvency starting point of 220% can help absorb most severe scenarios.

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L&G shares fell by more than 5% on the day that Simoes unveiled plans for £200 million a year of share buybacks and 2% dividend growth starting from next year.

This updated the previous dividend policy of 5% growth under predecessor Nigel Wilson, who spurned buybacks in favour of investment.

Simoes told City analysts that the combination of dividends and share buybacks meant the company intended to distribute more than what it would've otherwise with 5%.

A near-term catalyst for L&G is the potential sale of housebuilder CALA Homes, which is expected to fetch more than £1 billion. UBS believes that management will use any cash proceeds in a combination of capital returns and reinvestments.