Deutsche Bank upgrades UK insurers but downgrades Aviva

So far this year, the Stoxx 600 Insurance Index (SXIP) has delivered a total return of 12.1%, more or less in line with the Stoxx 600 Index (11.5%) but underperforming European banks by around 10% after earnings upgrades for the latter.

"With this largely behind us, an expectation of bond yields having peaked, a generally muted outlook for credit spreads, and a continuation of ongoing P&C [property and casualty] price increases, we think this provides the right environment for a stronger relative performance for the European Insurers – supported by increasingly resilient balance sheets," Deutsche Bank said.

"In this context, our Top Picks seek out relative laggards where momentum should be increasingly in their favour (a.s.r., Direct Line and Legal & General), or where we see further rerating potential, supported by improving bottom-up fundamentals."

For Direct Line in particular, the bank notes that the shares have dropped by around 60% over the past three years due to weak profitability, a strained capital base, and the need for provisions.

"However, we believe this is in the rear-view mirror, and that we will see evidence the group is being steered on the right path: first, via a dividend reinstatement with FY23 results; second, with margin expansion from above-market pricing; and third, with volume growth in 2024. This should be supported by a refreshed strategy from the incoming CEO," the bank said.

Deutsche Bank has raised its target price for the stock from 170p to 250p, suggesting around 30% upside from current levels.

In contrast, the bank has cut its rating for life insurer Aviva from 'buy' to 'hold' and dropped its target price from 495p to 485p, highlighting "small earnings headwinds and questions around excess capital return".