FTSE 100 insurer Legal & General Group PLC (LON:LGEN) has been upgraded to ‘Buy’ from ‘Hold’ by analysts at Deutsche Bank, however, it did not escape a target price cut as the bank downgraded its view on the sector.
In a note to clients, the bank said L&G offered “the best combination of quality, risk and reward” among UK life assurers, which it said had become “investment pariahs” in recent months thanks to a combination of credit risk and political instability from Brexit and the potential of “a more radical UK government”.
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“Though in reality, we would still expect a knee-jerk negative reaction on either of these outcomes, the analysis suggests that a number of stocks are now building in a worst-case scenario, even though the highest probability is still for some sort of ‘muddle-through’”.
For L&G, the bank said it was its “first choice for those looking to invest in an easing of UK political risk” with a 26% implied upside to the target price and with “less downside risk” than some of its peers.
Analysts added that the net balance sheet impact to the group from a no-deal Brexit and credit risk would be “less than perceived” and that the company had “worked hard to diversify its risk”.
“Sovereigns now represent 20% of investments, banks just 7% (all senior); and 50% of the non-sovereign exposure is overseas (currency-hedged). We estimate that the group’s solvency ratio is still comfortable as of end 2018e at 189% –with this remaining solidly positioned even on our further credit-related and Brexit stress tests.”
Deutsche also said it saw “a strong underpin to L&G’s growth outlook - with LGIM well-positioned still to gain inflows (mainly from overseas clients) and the UK industry bulk annuity market sales currently set to reach £30bn in 2019e vs an implicit £25bn in our L&G forecast”.
Sector knocked down to ‘Neutral’ from ‘Overweight’
However, L&G’s upgrade was bittersweet as its target price was cut to 290p from 305p, followed by the rest of the covered insurance stocks as analysts downgraded the sector to ‘Neutral’ from ‘Overweight’.
“2018 has shown that the insurance sector can outperform a falling overall equity market – helped for most of the year by rising bond yields. In the last few weeks, however, bond yields have actually fallen back sharply, and – though our strategists forecast that they will rise from current levels – we expect the positive impact for insurers of any such rise to be offset by wider credit spreads and the associated potential for rising default rates further out”.
In mid-morning trading Monday, L&G shares were up 0.55% at 236.5p.