JP Morgan cuts Genworth, Prudential to neutral (Update 2)

By Arup Roychoudhury and Anurag Kotoky
December 19, 2008

Dec 19 (Reuters) - JP Morgan Securities cut its rating on insurers Genworth Financial Inc (GNW.N) and Prudential Financial Inc (PRU.N) to "neutral" from "overweight," and said it was maintaining a cautious stance on the U.S. life insurance sector.

Shares of Genworth fell as much as 16 percent in morning trade, while those of Prudential fell 8 percent. The broader Dow Jones U.S. life insurance index .DJUSIL fell about 2 percent.

Insurers like Prudential and Genworth, who have seen their capital getting eroded away recently with heavy investment losses, are struggling to assuage investor fears amid a weak economy.

About a half dozen life insurers applied for Federal funds under the $700 billion U.S. bailout. No decision has yet been made by the U.S. Treasury.

"Although valuations are attractive, we expect weak earnings, poor operating trends, and capital concerns to limit upside until business fundamentals stabilize," analyst Jimmy Bhullar wrote in a note to clients.

The equity market decline is likely to pressure cash flows and assets under management growth in the variable annuity, asset management, variable life, and 401(k) businesses, which collectively account for about one-fourth of industry earnings, he added.

The analyst introduced year-end price target for the insurers and also upgraded UNUM Group (UNM.N) to "neutral" from "underweight" and Assurant Inc (AIZ.N) to "overweight" from "neutral".

"We are relatively more positive on companies where we have a greater degree of comfort in EPS estimates, operating trends, and investment portfolios," Bhullar said.

For the sector, Bhullar said he expects declining earnings estimates, poor sales/net flows and continued high investment losses to preclude multiple expansion for the insurers.

The analyst chose Reinsurance Group of America (RGA.N), on which he maintained an "overweight" rating, as the top pick.

Shares of Genworth closed at $3.34 Thursday on the New York Stock Exchange, while those of Prudential closed at $30.74.

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