A low interest rate environment has thwarted gains in life insurance stocks over the past year. While the group has returned a very respectable 23% over this period, the broad-based S&P 500 sports a return of 27%.
More recently, however, the segment received a bump on the passage of the Secure Act – a bill that aims to boost the use of annuities in 401k(s) and similar workplace savings plans, which should help life insurance companies boost sales volumes. "The bill will make it easier for employers to offer retirement plans with lifetime income options through annuities," said a statement from industry trade group American Council of Life Insurers cited by MarketWatch.
The new legislation may also increase demand for whole life insurance policies, as it requires nonspousal beneficiaries to deplete inherited IRAs within 10 years, preventing holders from running them out over a lifetime.
Those wanting exposure to leading life insurance companies should monitor the three stocks outlined below. Let's take a close look at each name and work through the charts to identify possible trading scenarios.
Prudential Financial, Inc. (PRU)
With a market capitalization of $38.67 billion, Prudential Financial, Inc. (PRU) provides insurance, investment management, and other financial products and services. The New Jersey-based company's U.S. Individual Solutions division develops and distributes individual variable and fixed annuity products, primarily to affluent markets. From a valuation standpoint, the life insurance giant trades at around 8 times forward earnings, below the industry average multiple of about 11 times. As of Jan. 21, 2020, Prudential Financial stock issues a healthy 4.12% dividend yield, but its 10.89% return over the past 12 months has underperformed other life insurance companies by roughly 5%.
Since bottoming out in the third quarter last year, the company's share price has trended steadily upward, forming an ascending triangle as it has moved higher. Friday's breakout above the pattern's top trendline, coupled with a recent bullish golden cross signal, may trigger more short-term buying activity that could result in a test of the 52-week high at $102.92. Those who take a trade should think about placing a stop-loss order just below the triangle's top trendline, which now acts as an area of support.
Principal Financial Group, Inc. (PFG)
Principal Financial Group, Inc. (PFG) offers a variety of retirement, asset management, and insurance products to institutional and retail customers. The company provides fixed, income, indexed, and variable annuities through its retirement, income solutions, and principal international segments. Wall Street expects the life insurance issuer's fourth quarter earnings to grow 28% from the year-ago quarter when the company reports on Jan. 28 after the closing bell. Principal Financial stock has a market value of $15.85 billion and yields 3.85%. As of Jan. 21, 2020, the firm's share price has added nearly 21% over the past 12 months to outperform the diversified insurance industry average by 5.4%.
After breaking out from a symmetrical triangle earlier this month, Principal Financial shares have consolidated above the pattern over the past week before breaking higher again in Friday's trading session. Also, the volume has steadily increased since the start of the year, suggesting accumulation by institutional money. Active traders who buy recent momentum should anticipate a test of the 12-month high at $59.57, which the stock set on July 26. Cut losses quickly if the price reverses trend and closes below $56. This offers a risk/reward ratio of just over 1:2, assuming a fill at Friday's $57.08 close ($1.09 risk per trade vs. $2.49 profit per trade).
Lincoln National Corporation (LNC)
Radnor, Pennsylvania-based Lincoln National Corporation (LNC) offers individual and group insurance as well as retirement and investment products to customers in the United States and the United Kingdom. The 115-year-old insurance broker's annuities division sells variable, fixed, and indexed annuities. Earlier this month, investment bank Morgan Stanley (MS) upgraded Lincoln National stock to overweight from equal weight on the premise that the company will return to record profitability in 2020 after temporary items weighed on 2019 results. The stock's projected earnings multiple of 5.91 sits 23% below its five-year average. Trading at $60.04, with a market cap of $11.91 billion and offering a 2.66% dividend yield, the firm's shares have gained just 6.08% over the past year as of Jan. 21, 2020.
Like Principal Financial, Lincoln National's share price has oscillated within a symmetrical triangle over the past four months. Although the stock closed above the 200-day simple moving average Friday, it still trades below the pattern's upper trendline. Traders could either buy at current levels or wait for a breakout on above-average volume to confirm buying interest. Once in a long position, look to book profits on a move up to the $66 level – an area where price may run into resistance from a double top that formed between May and August.