Key Takeaways
- Stock gains driven by takeover activity, earnings momentum, positive sentiment on whole financial sector.
- Valuations are also supported by sound balance sheets and rising dividends.
- Prudential stands out as undervalued despite its rally of more than 50% in the year to date.
The UK’s four largest insurance stocks, Prudential PRU, Aviva AV., Phoenix PHNX and Legal & General LGEN, have outperformed the UK market so this year. In particular, Prudential and Aviva, which are covered by Morningstar analysts, are leading the pack with significant stock gains of more than 50%, against a 16% rise in the Morningstar UK Index.
Why Are UK Insurance Stocks in Favor With Investors?
UK stocks with a defensive tilt have been in favor this year amid uncertainty on global trade and ongoing conflict, while insurers’ valuations have been helped by positive half-year results.
Higher dividends and share buybacks have increased the appeal of insurance stocks to investors, with Prudential, Aviva and Legal & General recently increasing payouts. Mergers and acquisitions activity has also attracted interest: Life insurance and investment giant Aviva bought Direct Line at a 73% premium to the company’s share price before the offer was made.
Are Any UK Insurance Stocks Attractively Valued?
Prudential is the latest FTSE 100 insurance stock to report earnings. The company beat forecasts for first-half profits, announced share buybacks and committed to increasing its dividend by 10% a year until 2027.
Of the two UK-listed insurance companies covered by Morningstar, Prudential screens as the most undervalued. A 4-star stock, Prudential is trading at a 20% discount to its fair value estimate of £12.10.
According to Henry Heathfield, equity analyst at Morningstar, the business is on track to either meet or surpass its 10% growth guidance for the full year. Prudential has also been bolstered by a 12% rise in annual premiums, he says.
Analysts at Bank of America reiterated their “buy” recommendation after the results: “A solid H1 results update came slightly ahead of expectations on all key metrics. Prudential is demonstrating double-digit growth on all key metrics, which should sustain for the foreseeable future. This was accompanied by a capital management update which exceeded our expectations.”
Aviva, which recently bought car and home insurance firm Direct Line, also reported positive earnings. Morningstar’s Heathfield noted a rise in insurance, wealth, and retirement profits as well as a “very solid” performance in general insurance profit. Its dividend was also increased.
After the results, Aviva’s 720p fair value estimate was maintained, versus a current share price of 655p. The company screens as a 3-star stock, and shares are fairly valued, according to Morningstar metrics.
