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KBW is bullish on life stocks in 2014

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Life insurance stocks continued to perform strongly in the fourth quarter amid improvements in both interest rates and the broader equity market, according to a new report from Keefe, Bruyette & Woods.

The fourth quarter performance capped off a strong year in which the median stock among those tracked by Keefe, Bruyette & Woods life increased 68.5 percent.

“Despite the run and, as explained in our recent outlook report, “2014 Outlook: Don’t Leave the Party Too Soon,” we [continue to] overweight the group,” the report states. “We see high-single-digit [earnings per share] growth over the next two years, driven by 3-4 percent top line growth, stable margins, and capital deployment.

“On top of that, we see some room for further multiple expansion, inspired by rising interest rates, a benign credit environment, and reduced risk profiles,” the report adds. “We’d note that the likelihood of dramatic news and surprising announcements this quarter is reduced by virtue of the fact that many companies have recently held investor days or outlook calls.”

Among the report’s conclusions:

  • Performance — Since the end of the third quarter 2013 reporting period on Nov. 7, the median life stock is up 10 percent.
  • Estimates — KBW’s fourth quarter 2013 estimates reflect an increase versus adjusted results of 16 percent year-over-year and 1 percent sequentially.
  • Price targets and valuation — KBW’s price targets are unchanged following the December updates. Looking at the sector overall, KBW expects a 17 percent multiple expansion in 2014 (median P/B multiple going from 1.16x to 1.36x).
  • Short-term trading biases — From a short-term trading perspective into the quarter, KBW is positive on Genworth Financial, Reinsurance Group of American, Lincoln National and Principal Financial Group.

“Despite our short-term trading bias, we remain Market Perform on each of these names with price targets of $15.50, $83, $58, and $54, respectively,” the report states. “We’re more cautious about the risk/reward into the quarter for AIZ and PRI. Despite the short-term bias, we retain our Market Perform rating on these two stocks with price targets of $63 and $47, respectively.