RBC Capital Markets has raised price targets on a number of UK life insurers believing the 250bps rise in long gilt yields this year should result in unprecedented demand for bulk annuities.
Demand for bulk annuities should significantly exceed supply, underpinning an expectation for an increase in volumes, written at better margins and improved capital strain, analysts at the broker wrote.
In a note reviewing prospects for the sector RBC said the long-term capital generated by higher new business should support additional dividend capacity of 35% of the sector's market cap and drive expectations for higher than consensus dividend growth rates.
“The enhanced bulk annuity opportunity should provide insurers with £11.9bn in additional capital generation” and “We expect this will come back to shareholders over the next 20-years, providing an additional 2ppts on the sector's yield.”
“We think a buying opportunity exists as sector trades on an average 2023 yield of 8.4%, as its discount versus the market has widened further.”
RBC has outperform ratings on Aviva PLC (LSE:AV.), Just Group PLC (LSE:JUST), Legal & General Group PLC (LSE:LGEN), and Phoenix Group Holdings PLC (LSE:PHNX)
pointing out an 8.4% 2023 dividend yield offers an attractive entry point.
Price targets were raised for Aviva to 520p from 510p, Legal and General to 320p from 310p and Phoenix to 740p from 710p. The price target for Just Group remained 155p.