JP Morgan has upgraded Aviva PLC (LSE:AV.) to 'overweight' and downgraded Legal & General Group PLC (LSE:LGEN) and M&G PLC (LSE:MNG) to 'underweight', arguing that relative value across the UK life insurance sector has shifted.
The bank reiterated its 'overweight' rating on Standard Life PLC (LSE:SL.).
UK life insurers have outperformed the SXIP European insurance index by 2 percentage points and the FTSE 100 by 6 points so far this year.
Corporate restructuring and merger speculation have driven much of that move.
Aviva, the FTSE 100 insurer, is the exception, having lagged its peers and de-rated against them.
JPM believes that leaves attractive relative upside.
The clearest ground for comparing the stocks is cash flow and capital returns rather than reported profits.
Earnings under international financial reporting standards are a poor guide to how much cash these businesses actually generate.
Instead, the bank analyses Solvency II operational capital generation, the surplus capital produced each year under European insurance capital rules.
It strips out the portion needed to maintain solvency ratios, leaving what it calls economic operational capital generation, used as a proxy for free cash flow.
On that measure, Aviva and Standard Life produce better free cash flow yields than Legal & General or M&G, the savings and investment manager.
Both also offer stronger potential for capital returns and better dividend cover.
Two further arguments reinforce the calls. Competition is rising in the UK pension risk transfer market, where companies offload defined benefit pension liabilities to insurers, squeezing margins on new business.
Legal & General, the FTSE 100 insurer and asset manager, is the most exposed of the group to that market.
Pricing in UK retail general insurance, by contrast, is stabilising and in places turning more positive.
That trend supports Aviva, which runs one of the largest motor and home insurance operations in the UK.
