Analyst downgrades life insurers after rally

Morgan Stanley analyst downgrades rating on life insurers after sector's recent gains

• On 1:10 pm EDT, Wednesday September 23, 2009

BOSTON (AP) -- A Morgan Stanley analyst on Wednesday cut his rating on life insurers, 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 Financial Inc. to "Equal-Weight" from "Overweight." 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.

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.

Life insurer stocks were mixed in midday trading. Aflac Inc. was up 42 cents, or about 1 percent, to $43.21; Ameriprise Financial Inc. dipped 10 cents to $32.78; Genworth Financial Inc. declined 8 cents to $13.26; Hartford Financial Services Group Inc. rose 42 cents, or about 1.5 percent, to $27.72; Lincoln National Corp. rose 44 cents, or 1.7 percent, to $25.84; MetLife rose 7 cents to $38.91; Principal Financial fell 19 cents to $27.57; Prudential lost 68 cents, or 1.3 percent, to $51.34; Reinsurance Group of America rose 63 cents, or 1.4 percent, to $45.68; StanCorp Financial Group Inc. slipped 18 cents to $40.24; Torchmark Corp. gained 2 cents to $43.93; and Unum Group fell 23 cents, or 1 percent, to $22.23.

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