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MetLife Still Has Legs, Says Deutsche Bank (Update 1)

Updated from 9:40 a.m. ET with comments on non-bank SIFIs from Sterne Agee analyst John Nadel.

NEW YORK (TheStreet) -- Life insurance stocks are hot, and the party isn't over, according to Deutsche Bank analyst Yaron Kinar.

The KBW Insurance Index closed at 188.26 Thursday, 49% this year. That's an amazing return, even in the midst of the bull market, when compared to a return of 21% for the Dow Jones Industrial Average , a return of 26% for the S&P 500 (SPX.X) and a return of 29% for the KBW Bank Index (I:BKX).

The stellar return for life insurance stocks reflects the importance of higher interest rates for the group, since the companies rely so much on interest income from investments. The benchmark rate on 10-year U.S. Treasury bonds was rising steadily heading into the September meeting of the Federal Open Market Committee, but many investors were surprised when the FOMC decided to allow the Federal Reserve's net monthly purchases of $85 billion in long-term bonds to continue.

The next FOMC meeting is on Dec. 17-18. Based on comments by Federal Reserve vice chair Janet Yellen during her testimony before the Senate Banking Committee on Thursday and other recent comments by Fed officials indicating December data may be suspect because of the partial government shutdown in October, it seems unlikely that the Fed will begin tapering bond purchases following its next meeting.

The market yield on the 10-year bond was 2.69%. That's up from 99 basis points from the end of April, but down from a closing peak of 2.98% on Sept. 5.

Current valuations for life insurance stocks imply a yield for the 10-year bond of roughly 3.00% 12 months from now, according to Kinar. However, a decision by the FOMC to begin tapering the Fed's bond purchases in March 2014 "would likely mean that yields move into 3.5% territory or above, and expectations of further increases would rise," the analyst wrote in a note to clients Thursday.

Kinar went further, writing that "if the Fed undergoes a normal hiking cycle, 10Y yields should currently be 3.65%."

If that seems like a stretch, consider how quickly the yield on the 10-year rose, from 1.70% at the end of April, to its recent peak in September, heading into the expected March 2014 taper.

Stock quotes in this article: MET, PRU, AIG 

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