Market volatility sparked by Russia’s invasion of Ukraine has hit shares in UK and European life insurers’ shares harder than other insurers, analysts at Berenberg said, but this is “wrong” and that M&G PLC (LSE:MNG) stands apart in terms of short-term upside based on its superior cash returns.
With the likes of Prudential PLC (LSE:PRU) and Legal & General Group PLC (LSE:LGEN) down by double digits, analyst Kathryn Fear and team argued that the relative underperformance of life groups is wrong for three reasons.
To start with, the life groups have “negligible exposure to Russia and Ukraine, and limited exposure to central and eastern Europe”, they noted.
On top of that, solvency as of December 2021 was high, and marking to market for market movements so far this year, the analysts estimate solvency levels are “little changed now”, with cash flow believed to remain strong and resilient, with “no risk to the aNN (NASDAQ:NNBR)ounced dividends and buybacks and that the outlook for dividend growth remains positive”.
Screening the sector for cash returns, M&G PLC (LSE:MNG) stood out, offering 19%, and Netherlands based NN Group at 15.6% – both well above most others at 10% or lower.
The pair “stand out so much relative to the rest of the sector” and are “off the scale in terms of cash return”, Fear said these high and compelling cash returns, backed by resilient business models, meant that they were upgraded to ‘buy’ from ‘hold’.
“Often a high forecast cash yield is associated with the risk that the dividend is likely to be cut,” Fear noted, but contended that for this pair it was not the case, “as their cash returns are supported by high solvency and strong cash remittances”.
M&G’s solvency is 218%, operating capital generation was £1.1bn in 2021 and M&G is targeting €2.5bn of cumulative cash generation between 2022 and 2024, which is equivalent to 1.6x cash dividend cover.
Keeping Aviva PLC (LSE:AV.) as its top pick in the life sector, Admiral for UK motor insurers and Beazley for Lloyds insurers, the Berenberg team said M&G provided “potentially shorter-term upside based on their very strong cash returns this year”.