LOS ANGELES (AP) — The Federal Reserve's interest rate policy will likely temper the value of life insurer stocks for the foreseeable future, Citigroup analysts said in a client note Monday, but shares of life insurers got a lift with the broader market rally.
Life insurers trade closely in line with 10-year Treasury yields, so the Fed's decision to maintain low long-term interest rates through at least 2013 will likely perpetuate the tough market for life insurance stocks into next year, Citigroup analysts Colin Devin and Priya Mehrotra said.
In August, the Fed pledged to keep a lid on short-term interest rates until at least the middle of 2013. The Fed's key lending rate acts as an anchor for yields on Treasurys due in coming years. That means it's likely that rates on one-year and two-year Treasury bonds also won't rise.
Insurers are sensitive to falling interest rates in part because that often makes it difficult for them to pay higher rates guaranteed in insurance contracts such as annuities and universal life policies sold earlier.
The analysts highlighted Unum Group and MetLife Inc. among their favorite stocks in the sector, but said they see Unum having more upside potential over the next three to six months.
They cited Unum's more stable earnings outlook and lower sensitivity to the decline in long-term interest rates compared to MetLife. In addition, Unum can decide to raise its dividend or buy back shares without prior approval from the Federal Reserve — something MetLife is required to obtain as a federally regulated bank holding company, the analysts said.
Devin and Mehrotra also contend there is strategic uncertainty with MetLife following its recent CEO transition, which could lead to a major overhaul of the company's operations.
Last week, MetLife disclosed that two of its three top executives would be leaving the company.
The analysts reiterated their "Buy" rating on Unum and MetLife, but reduced their price target and earnings per share outlook for 2012 and 2013 for each company. They now expect Unum to earn $3.20 per share for 2012, down from $3.25. For 2013, the analysts expect earnings of $3.55 per share. Their price target on Unum shares is $25, down from $27.
The analysts cut their price target on MetLife shares to $39 from $42, and their 2012 earnings forecast to $5.05 per share from $5.40 per share. For 2013, they anticipate MetLife to earn $5.70 per share.
Monday afternoon, the Dow was up 291 points, or 2.6 percent, to 11,523 as of 2:30 p.m. Eastern, while the Nasdaq composite stock index rose 82, or 3.4 percent, to 2,524.
Insurers' stocks rose in line. Unum shares rose 46 cents, or 2.2 percent, to $21.18, while shares of MetLife added 81 cents, or 2.9 percent, rising to $28.72.
Elsewhere in the sector, Lincoln National Corp. rose 68 cents, or 4.1 percent, to $18.30; AFLAC Inc. gained $1.23, or 3.2 percent, to $40.28; Ameriprise Financial Inc. added $1.10, or 2.7 percent, to $42.61; Prudential Financial Inc. rose $1.53, or 3.4 percent, to $46.44; Sun Life Financial Inc. added 38 cents, or 2.2 percent, to $17.85; Torchmark Corp. gained $1.02, or 2.6 percent, to $40.70; and, Principal Financial Group rose 60 cents, or 2.8 percent, to $22.03.