With another FOMC meeting scheduled on Mar 14 and Mar 15, investors are waiting to see if the Fed hikes interest rate once again. The Fed had indicated three rate hikes in 2017 at the December FOMC meeting amid a stabilizing economy, improving employment and inflation reaching 2%. It had projected median unemployment rate of about 4.5% in the next three years and median inflation of about 1.9% in 2017, and 2% each in 2018 and 2019.
According to the Fed, the median projection for interest rate should be 1.4% by year-end 2017, 2.1% by year-end 2018, and 2.9% by year-end 2019. The Fed also hinted at three more hikes in 2018.
Trump’s “business friendly approaches”, expectation of a lower tax rate, softer regulation and bias for higher interest rates among others continue to raise investor optimism.
The Finance sector is among the ones that stand to benefit from the interest rate hike. Banks profit the most from the rise in interest rate as the spread between earnings by funding longer-term assets with shorter-term liabilities increases.
Another beneficiary of increasing interest rates is the insurance industry. This is because investment income, which is directly proportional to interest rate, is likely to increase. Investment income is an important component for insurers’ top line alongside premiums earned. Insurers invest the premiums they receive from policyholders in bonds and securities, which are reinvested in fixed-income securities upon maturity. Thus, a higher interest rate allows insurers to earn higher investment income and generate greater yields.
Higher rates should come as a respite for life insurers that suffered spread compression on products like fixed annuities and universal life due to persistently low rates. These insurers generate most of their earnings from the spread between investment returns and what they credit as interest on insurance policies and products. Hence, a higher interest rate yields more investment return for these companies. Annuity sales too should benefit from a higher rate environment.
Hence, it might be prudent to turn your attention to these insurance stocks that have long been ignored.
Making the best investment decision can be an uphill task. Hence, we have zeroed in on four insurers that are worth investing in amid a higher interest rate environment. We have chosen companies that have market cap of less than $10 billion and whose shares have lost value in the last three months but have a favorable Zacks Rank #3 (Hold).
With a market capitalization of $2.2 billion, Kemper Corporation (KMPR) provides property and casualty, and life and health insurance to individuals and businesses in the United States. Shares of the company lost 6.39% in the last 12 weeks while that of the Zacks categorized Multiline Insurance gained 0.08%. However, the expected long-term earnings growth rate is currently pegged at 10%. Its valuation is also attractive at the current level with price to book of 1.1, which is lower than the industry’s average of 1.3.
With a market capitalization of $1.3 billion, Maiden Holdings, Ltd. MHLD provides reinsurance solutions to regional and specialty insurers in the United States, Europe, and internationally. Shares of the company lost 10.62% in the last 12 weeks while that of the Zacks categorized Property and Casualty Insurance industry gained 6.30%. Its valuation is also attractive at the current level with price to book of 1.2, which is lower than the industry’s average of 1.4. Notably, Maiden Holdings has delivered positive surprise in the last four quarters.
With a market cap of $0.5 billion Heritage Insurance Holdings, Inc., HRTG provides personal and commercial residential insurance products. Shares of this property and casualty insurer lost about 3.39% over the last three months while that of Property and Casualty Insurance industry gained 6.30%. Its valuation is also attractive at the current level with price to book of 1.3, which is lower than the industry’s average of 1.4.
With a market cap of $0.6 billion, Universal American Corp UAM provides health insurance and managed care products and services to Medicare and Medicaid customers in the United States. Shares of this life insurer lost about 0.3% in the last three weeks while that of Zacks categorized Life Insurance industry gained 2.20%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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