If 10-year yields begin to rise, life insurance stocks such as Lincoln National Corporation (NYSE:LNC) will outperform the broader market. Analysts at Bank of America Merrill Lynch also upgraded the stock to Buy from Neutral on February 27.
Investors seem to be anticipating higher interest rates in advance, as Lincoln National Corporation (NYSE:LNC) Financial has risen more than 25% year-to-date as of this writing on March 25.
Unum Group (NYSE:UNM)
March 21, 2013; Recorded webcast
Unum provides financial protection benefits such as disability, life, accident, and critical illness insurance. When I first graduated from college, I worked in Compensation & Benefits at Burger King headquarters in Miami, FL and we used Unum services for our employee populations. In addition to Burger King, the company provides financial protection insurance to more than 100,000 companies and 25 million people.
Unum reported fourth quarter 2012 results back on February 5 with a $0.82 profit compared to $0.77 consensus. Revenue also came in higher than expected at $2.66 billion vs. $2.63 billion. Book value per share increased to $31.87, indicating that Unum is trading at slightly less than 1x price/book value at current market prices.
Analysts at SunTrust and UBS have spoke positively on Unum in recent weeks, based on the firm’s increasing book value and earnings stabilization. I believe these factors are pertinent for the insurance sector as a whole, which helps explain the double-digit gains in share price so far this year.
With respect to Unum, analysts believe that accelerating payroll growth will increase earnings over the next 12 month. A declining unemployment rate indicates more Americans are back at work, and therefore eligible for Unum’s financial protection services. Deutsche Bank also raised its price target to $31.00 from a previous $27.00 recently on March 21.
Foolish Bottom Line
While the Federal Reserve’s intended federal funds rate remains between 0.00% – 0.25%, higher interest rates are a foregone conclusion in the medium and long-term. Insurance companies are a key beneficiary of a rising Treasury rate environment, and this effect will likely be demonstrated through higher stock prices across the sector.
Readers should consider any of the three stocks outlined above, or the SPDR S&P Insurance ETF for greater diversification. Aflac and Unum are both top 10 holdings of the exchange-traded fund.
For more information on J.P. Morgan’s 2013 Insurance Conference, visit the bank’s website to reference a webcast schedule / agenda.
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The article Can the Breakout Rally in Insurance Stocks Continue? originally appeared on Fool.com is written by John Macris.
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