Phoenix Group Holdings PLC (LSE:PHNX) was added to Aviva PLC (LSE:AV.) as one of UBS's top picks in the European insurance sector going into 2026.
The past year was the fourth in a row of the sector outperforming most of the broader equity market, but with tailwinds from high rates and strong pricing beginning to fade.
Insurance has "feasted on some of the desserts of a multitude of tailwinds", said UBS analysts Will Hardcastle and Nasib Ahmed, adding that they "don't believe a famine immediately follows the feast".
"We see the sector as having full stomachs that can help to counter some of the emerging headwinds. The tailwinds are neutralised to becoming headwinds, but we believe the bigger balance sheets help to justify the sector's valuation."
Overall, the Swiss bank has a neutral stance on the sector, but sees individual subsectors as still attractive.
Phoenix was upgraded to 'buy' due in part to to the UBS's broader preference for UK life insurers over their non-life peers and continental counterparts, as well as the company's outlook of robust capital generation, a resilient balance sheet, and expectations for meaningful shareholder returns.
Life insurers are still in an appealing spot due to yield curve dynamics and macro conditions that favour long-duration balance sheets.
And Phoenix is seen as standing out among the UK life companies for its 10% all-in yield potential, underpinned by steady free cash flow growth and defensive solvency positioning, with deleveraging expected to complete by mid-2025, unlocking £150 million per year in potential share buybacks.
They forecast Phoenix’s capital generation to grow by 10% annually between 2027–29.
“We see Phoenix as the highest return on Solvency II book value stock in the sector,” the analysts wrote, highlighting its capacity to absorb credit shocks and maintain solvency within its 140-160% target range even in extreme downturns.
Aviva also remains a top pick, with UBS highlighting its capital-light strategy and 11% EPS growth outlook.
Prudential PLC (LSE:PRU) is favoured, too, for its emerging market exposure and potential 20% capital return over three years.
Conversely, Legal & General Group PLC (LSE:LGEN) and M&G PLC (LSE:MNG) are not so liked, with UBS citing subdued growth expectations and lower capital deployment.
M&G and Admiral Group Plc (LSE:ADM), were both downgraded, the former for limited scope for upside after good gains this year, and the latter hampered by weak UK motor pricing trends.