A Morgan Stanley analyst today cut his rating on life insurers, including Prudential Financial Inc., saying the sector remains fundamentally sound but is unlikely to extend a recent surge in stock prices.
Nigel Dally cut his rating of life insurers to “in-line” from “attractive.”
“While we continue to expect solid fundamental improvement, upside is looking limited following the nearly 50 percent surge in stock prices of the life insurers over the past three months, as capital concerns were put to rest,” Dally said in a research note. “From here, we expect appreciation to be more in-line with the broader market.”
Dally also raised earnings estimates for most stocks in the sector, citing benefits from a recent broad rally in stock and bond prices as well as from recent cost-cutting by life insurers.
But Dally cut ratings on two insurer stocks, downgrading Unum Group to “underweight” from “equal-weight” and Prudential to “equal-weight” from “overweight.” Prudential has operations in Hartford.
Dally said he sees “limited upside potential” for Unum compared with other stocks in the sector as weak labor markets pressure the company’s revenue growth.
He said Prudential’s stock may have reached close to its fair value after a 72 percent gain year-to-date. Prudential also faces potential headwinds from its exposure to the weak commercial real estate market, he said.
Dally kept his rating at “overweight” for his three current favorites in the sector: MetLife Inc., Reinsurance Group of America Inc. and Principal Financial Group Inc. MetLife has operations in Bloomfield.
But he said overall, stock prices in the sector are likely to moderate, in part because of its exposure to commercial real estate, the potential for high credit losses, and the possibility that some insurers will see their financial strength ratings cut.
“With the group now trading at a premium to reported book value, we expect the rally to run out of steam and for further appreciation to be more inline with the broader market,” Dally wrote. (AP)
