UPDATE 1-Morgan Stanley raises view on US life insurance sector

May 27 (Reuters) - Morgan Stanley raised its view on the U.S. life insurance sector to "attractive" from "in-line," saying concerns about capital adequacy have diminished and the fundamental outlook for the group is improving.

"We are now beginning to see clearer signs of light at the end of the tunnel," the brokerage said in a note to clients.

Morgan Stanley said it expects book values to sharply increase when life insurers report second-quarter earnings and if credit markets remain stable, book values may rise just over 20 percent on average.

Many life insurers are holding significant excess liquidity at their subsidiaries that might be used to invest in bonds, boosting net interest income, and the benefits of various expense-reduction programs could be seen by the end of the year, the brokerage said.

The brokerage also upgraded Principal Financial Group Inc (PFG.N) to "overweight" from "equal-weight," saying capital and liquidity concerns have significantly reduced following its recent debt and equity offerings.

Morgan Stanley, which also raised its price targets on four insurance companies including MetLife Inc (MET.N), said consolidation could emerge as a driver for the group.

"As we emerge from the crisis, we believe attitudes toward various acquisitions will likely change. With substantial potential synergies, this could also help restore profitability across the industry," the brokerage said.

For alerts, please double-click [ID:nWNAB3753] (Reporting by Santosh Nadgir in Bangalore; Editing by Deepak Kannan)