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 Treasuries 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.
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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.