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Expert View special: the UK's top insurance stocks
We reveal Bank of America Merrill Lynch's top picks in one of the hottest sectors in the year to date.
In a special edition of the Expert View, we take a look at Bank of America Merrill Lynch's pick of the UK's life and non-life insurance businesses. All of the following shares have a 'buy' recommendation from the broker.
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Fears over Prudential's Asia business overcooked
Concerns over a slowdown in Prudential (PRU.L)'s Asian business have been overdone, according to the analysts, making for what they believe is a highly attractive valuation.
The UK life insurance sector has had a stonking start to the year, the analyst note, rising 20% so far, and they expect the sector to contine to shine as investors are drawn to the attractive yields on offer.
Prudential's first-half results are due on 12 August, and the analysts are pencilling in 15% growth in operating profits. 'We expect to see good underlying progress in both Asia and the US, with some minor accounting issues and some start up costs in Asia providing only a slight drag,' they said.
The US business, meanwhile, will continue to attract interest as a future disposal candidate. The analysts have a target price of £13 on the shares.
Shares in the group closed at £11.44 on Friday, down 26p or 2.2%.
Resolution: low volatility and high yield
Resolution (RSL.L) earns a place on the 'buy' list thanks to its attractive balance of low volatility, high yields and share price upside, the analysts said.
'We have confidence on cashflow generation and the ability to grow the dividend (currently a 7% yield) over time,' they said.
'We believe that the stock will continue to re-rate towards a sector yield by delivering stable results and reiterating its message of a normal life company, run for cash, only selling new business when it’s profitable to do so.'
Resolution's first-half update is due on 13 August, and the analysts expect sales to remain subdued, with the bulk of auto-enrolment business due to arrive in the second half of the year. They also said any progress on the £400 million cashflow target would be an important factor to monitor.
Shares in the group closed at 316.9p on Friday, down 1.7p or 0.5%.
St James’s Place justifies its premium rating
St James’s Place (STJ.L) is one of the few true growth stories in the UK insurance market, according to BoA Merrill Lynch, which justifies its premium rating.
Wednesday's trading update should show strong new business figures, with the analysts expecting 40% cash generation growth year-on-year, putting them 12% ahead of the consensus estimate.
'St. James’s Place appears well placed for the post-RDR world,' the analysts said, referring to the retail distribution review overhaul of the financial advice industry. 'We expect sales to be boosted in H2 as the Partnership begins to pick up ‘orphan’ clients whose advisers retired as a result of RDR.
'Stable bull markets have helped SJP achieve exceptional results in recent quarters; continued market stability will help the company to drive more new business and relieve some margin pressure.'
The analysts have a target price of 655p.
Shares in the group closed at 591p on Friday, down 0.5p or 0.1%.
Direct Line's yield could rise higher
Direct Line (DLG.L)'s 6.7% yield has the potential to rise given the insurer's sturdy balance sheet, according to Bank of America Merrill Lynch.
The analysts expect Friday's trading update to show an operating profit of £284 million for the first half of the year. For the full year they project £504 million, up from £461 million last year.
The key issues for the firm are to focus on margins rather than volumes and to seize the opportunity for cost savings following substantial restructuring costs, according to the analysts. Non-life insurance companies have lagged the life companies so far this year, rising 9%.
The price target sits at 240p. 'At our price objective, the shares would trade at 9.5x 2014E underlying price to earnings and 1.5x 2013E tangible equity,' they said. 'This would be aligned with its peer group.'
Shares in the group closed at 225.9p on Friday.
Special dividend brings Lancashire into contention
Probably less well known to investors is Lancashire Holdings (LRE.L), the specialist insurer that will yield 11% and has a preference for special dividends, according to the Bank of America team.
Lancashire, which is headquartered in London but registered in Bermuda, provides insurance for the property, energy, marine and aviation industries.
‘Lancashire’s tendency to pay a special dividend should also bring it into consideration,’ say the Bank of America team.
They describe it thus: ‘High quality capital and cycle manager that has built a best in class reputation. While the 1.6x P/BV [price to book value] multiple is not cheap, we still see mild re-rating potential.’
Shares in the FTSE 250 company ended Friday trade 0.8% lower at 809p.
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Look up the shares
- Prudential PLC (PRU.L)
- Resolution Ltd (RSL.L)
- St. James's Place PLC (SJP.L)
- Direct Line Insurance Group PLC (DLGD.L)
- Lancashire Holdings Ltd (LRE.L)