Insurers May Face Stock Sell-Off as Bond Yields Drop to Record Lows

Allianz SE, Europe’s biggest insurer, was cut to underperform by Jefferies Group as the investment bank warned insurance stocks may face an industrywide sell-off.

“If bond yields fall further from here, the sector will likely sell off as investors factor in the increased pressure on margins,” analysts Mark Cathcart and Anasuya Iyer said in a report published Monday.

Insurance companies saw income from holding fixed income assets such as German bunds shrink as the European Central Bank’s bond-buying program pushed yields to record lows. Low interest rate policies by central banks are threatening insurance firms and pension funds, BlackRock Inc. Chief Executive Officer Laurence D. Fink said last week.

Lower earnings from bonds mean profit at Allianz, which also ranks as Europe’s largest asset manager, may remain flat until 2020, Jefferies said. It also reduced Munich Re, the continent’s biggest reinsurer, to underperform from hold.

A trend of buying insurance stocks because of their higher dividends “appears to have run its course,” the analysts said.

Gains for the companies, which beat those of the wider market over the past year, have begun to reverse. The Stoxx Europe 600 Insurance index dropped 3.3 percent this month, with 25 of 40 stocks declining, paring an advance over 12 months to 29 percent. The benchmark Stoxx Europe 600 has increased 2.9 percent in April, taking gains over the period to 22 percent.

The outlook for the insurance industry may improve if bond yields start to climb, Jefferies said.

As well as lower investment income, Allianz faces a challenge to reverse outflows at asset manager Pacific Investment Management Co. (Pimco), following the departure of its top fund manager Bill Gross, the analysts said.

“Pimco’s recovery remains far from certain with downside risks for both margins and outflows,” they said.

Jefferies also cut the rating of Munich Re because of expectation of falling prices and lower demand. Jefferies said.

–With assistance from Chris Malpass in Berlin.