Investors have greater confidence in general insurance than life insurance, according to one investment bank.
Keefe, Bruyette & Woods (KBW) said falling bond yields challenging the profitability of life insurers mean investors are more likely to move into general insurance.
In Europe, the sector under-performed the equities market by over 5% in the second quarter of 2005.
According to KBW the main theme for 2006 will be capital management, with the likelihood of investors frustrated at the lack of capital being returned to them.
It said if consolidation continues, investors will fear that senior managers will redeploy rather than return capital.
But the pace of consolidation is light and KBW concludes: "While the European banking sector 'sizzles' with cross-border mega-mergers, the insurance sector has seen more smoke than fire."
A possible turnaround in insurance equities may be stymied by stiff competition in the sector and though KBW sees non-life pricing remaining disciplined, the soft market is seen to be gaining pace.
KBW gave Aviva an outperform recommendation and a price target raise as it has traded on the lowest price/ fair value of the UK large caps.
Brit's price target has also been raised. It is seen to outperform as its "non-Lloyd's platform and relatively low volatility portfolio mean its earnings are less geared to the underwriting cycle."
Benfield, on the other hand, is viewed as underperforming due to a disappointing lack of underlying revenue growth.