Investors who believe the Federal Reserve is cooking up certain inflation by continuing its asset buying programs might want to take a look at insurance sector stocks today. If the critics are right about rising prices and interest rates, the insurance shares may be in bargain territory.
The Fed’s unexpected recommitment to keeping interest rates very low sent life insurance stocks falling on Wednesday while the rest of the market partied. The chart below shows Prudential Financial (PRU), MetLife (MET), Hartford Financial (HIG) and Unum through Wednesday, as seen in a stock chart. They had lost another 1.8% to 3% by midday Thursday.
NYSE:PRU data by YCharts
That’s because insurers make money mainly on their investment skills; on their abilities to turn premium payments into bigger cash piles through bond buying and other investments. It’s difficult for the companies to get decent returns on low-risk investments when 10-year Treasury rates are below 2%, as they were for most of last year. Insurers generally have been wonderful investments this year because interest rates were climbing.
NYSE:PRU data by YCharts
Major insurers like those charted above still trade close to or below book value, as they have since 2008. When comparing these companies for investment on interest rate trends, it’s important to delve into the types of products they sell. Companies that still hold a lot of older, fixed-rate commitments – perhaps annuities, or universal life policies sold around 2006 – will have bigger drags on investment gains than those selling term life, for example. Also, international portfolios often are mixed blessings, perhaps containing bad European investments as well as coveted exposure to emerging markets, for example.
Among analysts, Prudential and MetLife are two favored stock picks in the sector. Prudential has been ramping up sales of variable rate annuities, which give it more control over risk than fixed-rate products, and it has particularly strong overseas operations. MetLife is the largest seller of group life insurance; the kind purchased for employees by corporations. Both offer dividend yields above 2%.
Regardless of diversification, there’s no doubt that all of these companies will be hurt if a low interest rate environment drags on. But for those confident in their predictions of future inflation, the insurers offer one way to hedge.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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