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(Sharecast News) - JPMorgan upgraded Aviva on Thursday to 'overweight' from 'neutral' and reiterated its 'overweight' stance on Standard Life, but downgraded Legal & General and M&G to 'underweight' from neutral'.
The bank said that factors including corporate restructuring and M&A speculation have led UK life insurers to outperform the Stoxx 600 insurance index and the FTSE 100 index by 2ppts / 6ppts, respectively, year to date.
"Aviva is the exception: it has lagged and de-rated versus its peers, and we believe it now offers attractive relative upside potential," JPM said. "Cash flow and capital returns is where the relative value debate on these stocks is clearest, with IFRS earnings a poor guide to free cash.
"We analyse the Solvency II operational capital generation (OCG) that may be returned to shareholders without eroding Solvency II ratios - or 'economic OCG'- as a proxy for FCF."
JPM said Aviva and Standard Life are generating better FCF yields on this basis than L&G or M&G, with superior capital return potential and dividend cover.
"Two additional debates reinforce our views: rising competition and weaker new business margins in the UK PRT (Pension Risk Transfer) market, to which L&G is most geared, while UK retail general insurance pricing trends are stabilising / turning more positive, supporting Aviva."
The bank lifted its price target on Aviva to 800p from 715p, while the PT for Standard Life was upped to 1,075p from 975p.
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