Rise in interest rates positive for life stocks

In support of his positive assessment, Nadel observes that life insurance stock valuations are low relative to those of prior years. So investors would to do well to maintain “exposure” to the sector. He added that whereas investment “specialists” (among them hedge funds) are reducing exposure to the industry, “macro/generalists” are buying insurance stocks. He cautioned, however, of Federal Reserve policy decisions on life insurance stocks.

“We wonder how strong the hands will be if [Federal Reserve Chairman Ben] Bernanke convinces more investors that long-term rates have moved too high already and economic conditions (inflation, housing/refi activity, recent retail sales, etc.) provide sufficient justification to postpone tapering,” he wrote. “Unfortunately, in our view, returns generated in the life sector are likely to remain primarily beta-driven, based upon getting the macro call more right than wrong.” “[MetLife and Prudential Financial] remain undervalued, in our view, and we remind investors both may have significant capital deployment opportunities in pension closeouts with funding gaps declining (a potential 2H13 catalyst),” he added.