However, following the first-half results season, the bank’s insurance analysts resumed coverage of most of the UK names, with many getting their share price targets hiked.
Phoenix Group PLC (LON:PHNX) was downgraded to ‘neutral’, where it joined the rest of its London sector peers: Admiral (LON:ADM), Aviva (LON:AV.), Beazley (LON:BEZ), Hiscox (LON:HSX), Just Group (LON:JUST), Legal & General (LON:LGEN), Prudential (LON:PRU) and Saga (LON:SAGA).
Results season produced significant divergence in performance, the analysts noted, with the impacts of the coronavirus pandemic far greater on certain parts of the sector than others.
“We had expected the personal lines players and life companies to fare better than the reinsurers and multi-liners, however, perhaps the most important difference was in developments on capital management,” they said.
This included positive surprises, including for Direct Line, and rebasing strategies, including for Aviva and Prudential.
The top picks, the analysts said, “generally reflect our view that potential COVID-19 exposures are likely to remain on investors’ minds, and that strong balance sheets with attractive capital return stories should be preferred”.
UK non-life insurers generally offer attractive capital returns, particularly those with a focus on personal lines such as motor, with Cazenove's view being that Direct Line's potential remains "outstanding" at 12.7% for the current year and 9.4%/9.8% thereafter.
Both Admiral and RSA, in their view, also offer "compelling reasons to hold the shares", while for the Lloyd's players the analysts view "the combination of COVID-19 uncertainty and a sharply improved growth outlook as not conducive of large dividends at the current time".
UK life insurers offer “attractive headline capital return” but are seen as typically also carrying high asset risk and lower headline Solvency II ratios, which makes the analysts cautious on names like L&G, Aviva, Just Group and Prudential.