Credit Suisse initiates coverage of UK life insurers

Credit Suisse initiated coverage of five UK life insurers on Thursday.

The bank started Aviva at 'outperform' with a 640p price target, based on its sector-leading operating free cash flow yield ranging from 12.4% in 2017 to 11.4% by 2020 supported by a combination of underlying operational improvements and self-help opportunities.

"The improving capital flexibility means management could surprise with additional returns to shareholders above the ordinary dividend by as early as 2017e – we expect a special dividend of 16.0p, representing a 3% yield on the current share price," the bank said.

It started Prudential at 'outperform' with a 2,045 price target, saying it is well positioned to capture international growth, while St James's Place, which it also initiated at 'outperform', is best placed in the UK pensions & savings growth market.

CS set a 1,240p price target on St James's Place.

The bank initiated coverage of Just Retirement at 'neutral' with a 135p price target. It reckoned the current valuation represents fair value, with most of the negative sentiment priced in.

"However, there may be the potential for upside risk if JRP participates in further industry consolidation driven by the onerous capital and asset liability matching requirements under Solvency II."

CS started Legal & General at 'underperform' with a 215p price target, saying it expects a number of headwinds to persist over the medium term.

"The company's future growth strategy is reliant on increasing volumes of UK annuities, where capital requirements have doubled under Solvency II. To overcome this, greater use of reinsurance is required, but we estimate this also lowers future cash flows by around 25-35%, which we think is not fully priced in."

Credit Suisse added that in order to partially offset the higher cost of capital, the company is re-risking the balance sheet in the search for yield, which will add volatility.