UK life companies are the standouts among the insurance sector, according to UBS, with all-in yields of 10.4% compared to 7.8% for the sector.
Legal & General Group PLC (LSE:LGEN) has been upgraded to buy but Aviva PLC (LSE:AV.) remains the preferred investment for the Swiss bank.
Key to the ratings will be management action, adds the bank, which has the potential to drive 30-80% of capital generation for these companies and is essential to the delivery of shareholder capital returns.
“Management actions are so important that some insurers can barely maintain their dividend cover without them,” said UBS.
For example, Phoenix's dividend cover of 121% could fall to less than 30% if management actions are excluded.
These actions include asset and liability optimisation, cost savings, and capital optimisation.
“We see the greatest upside to guidance for L&G, with UBS estimating £350m per annum of management actions versus guidance of approximately £200m per annum.
"We expect these management actions to be driven by asset trading.
“We see downside risk to Phoenix's long-term management action expectations of approximately £400m per annum (UBS estimate £200m).
“However, in the near term, we expect Phoenix's management action delivery to be supplemented with capital optimisation.
“We expect M&G to generate £125m per annum and Aviva to generate £250m per annum of regular management actions.
Price target changes include upgrades to Aviva 580p (from 555p) and L&G 260p (from 240p), with Phoenix reduced to 610p (from 630p) and M&G to 218p (from 230p).