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No Interest Rate Hike: Insurance Stocks in Focus

Zacks Equity Research

Following the Federal Open Market Committee’s (FOMC) meeting on Wednesday, Sep 20, 2017, it did not come as a surprise when the Federal Reserve left interest rates unchanged, ranging between 1% and 1.25%. However, investors are still looking forward to another interest rate hike this year, as indicated by the policymakers at the meeting. Interestingly, the Fed committee also expects to raise interest rates three times in 2018.

Although, the Federal Reserve made a monumental decision with the announcement of clipping the $4.5 trillion in investments, which will start from next month, by unburdening just $10 billion that will comprise $6 billion in Treasury securities and another $4 billion in agency debt per month through December.

Per Fed Chair Janet Yellen, the normalization process can be expected to be gradual as well as predictable. This landmark resolution will help ingraining confidence among the insurers, pertaining to sustained economic growth. The meeting marks a milestone in the U.S. economy history after a decade of financial crisis. This in turn underlines the confidence shown by the Fed committee.

Factors Behind Leaving the Interest Rates Unchanged

Massive catastrophe losses, having devastated some of the parts of the country as well as low inflation were reasons for keeping the rate unchanged as per some Fed officials from the Fed committee.

Hurricanes Harvey, Irma and more recently, Maria, have caused large-scale destruction, which would hurt the U.S. economy on a short-term basis but will not put a dent in the overall economic health of the country. Per the AB senior economist, Eric Winograd, the catastrophe events will certainly not hold back the U.S. economy, given the solid foundations to keep it afloat and help it retain its momentum.

Coming to inflation, the Federal Reserve delivers no proper explanation as to why inflation is still running below the target, in spite of the improving employment scenario, reviving housing market and a positive consumer sentiment. Also, the Fed continues to anticipate inflation to remain at 1.6% — falling shy of the 2% target, which is considered good for the economy — and the unemployment rate to be around 4.3%.

Hence, low inflation, rapidly changing climatic conditions that have resulted in the occurrence of the harmful hurricanes and the short-term boost to the gasoline prices, render uncertainty to the Federal Reserve’s decision to raise interest rates in the near term.

Nonetheless, per a Barclay’s analyst, the current slowdown in the inflation is not substantial enough to make an early prediction whether this lingering factor might permanently change the Federal Reserve’s future plans or not.

Additionally, the central bank’s economic growth projection — raised to 2.4% from the previous 2.2% — was a ray of hope in the overall economic horizon.

Slow but Steady — Impact of Rising Interest Rates on the Insurance Industry

With the conclusion of Wednesday’s FOMC meeting, the market is pinning hopes for the next rate hike, which is likely boost the insurance industry’s prospects and help insurers strengthen their market position.

It is important to mention here that a slowly improving interest rate environment, with the Fed increasing the interest rates three times since December 2016, has been a respite for the insurance industry since insurance companies are sensitive to it.

The gradual rise in interest rates has been positively influencing the insurers, with the latter benefitting the most from this apparent improvement. Even with the slow-paced rising rate environment, the life insurers — who have been suffering from spread compression on products like fixed annuities and universal life due to persistently low rates — have breathed a sigh of relief. Thus, given the high dependence on investment income, life insurers will gain more from a rising rate environment.

On the other hand, non-life insurers have already begun to display improving investment income, instilling confidence among the investors.

With the insurers being connected to interest rates, the current stiff monetary policy has started aiding the industry.

A progressing rate environment will lessen the pressure on the insurers’ investment income, thus boosting their earnings. This in turn will accelerate the insurance companies’ overall growth in the future.  

Key Insurance Stocks in Focus

Given the catastrophe losses, which might hurt the underwriting results to render volatility to the earnings performance in the upcoming quarter and the blow of low inflation looming large over the Fed’s decision to how quickly raise interest rates, the insurance industry can look forward to a better investment income performance in the near term to lend an overall boost.

Following are some of the key picks, expected to benefit from the rising interest rates, while maintaining a bullish Zacks Rank #1 (Strong Buy) or Rank #2 (Buy) with a Growth Score of A or B. A buy-rated stock along with a favorable Growth Score offers best investment potential.

Elk Grove Village, IL-based Atlas Financial Holdings, Inc. AFH deals in underwriting commercial automobile insurance policies in the United States. The company, having a Growth Score of B, witnessed 2017 and 2018 estimates moving north by nearly 4.5% and 2.6%, respectively, over the last 60 days. This is reflected through the company’s Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, shares of Atlas Financial have rallied 20.1% quarter to date compared with the industry’s gain of 5.9%.

Grand Cayman, the Cayman Islands-based Greenlight Capital Re, Ltd. GLRE deals in provision of property and casualty reinsurance products and services worldwide. The company, having a Growth Score of A, witnessed 2017 and 2018 estimates moving north by nearly 85.7% and 8.7%, respectively, over the last 60 days. This is understood by the company’s Zacks Rank #2.

Shares of Greenlight Capital have slid 0.5% quarter to date compared with the industry’s increase of 5.9%.

Tampa, FL-based Health Insurance Innovations, Inc. HIIQ works as a developer, distributor and administrator of cloud-based individual health and family insurance plans apart from supplemental products in the United States. The company, possessing a Growth Score of A, witnessed 2017 and 2018 estimates moving north by nearly 6.8% and 5.7%, respectively, over the last 60 days. This is evident through the company’s Zacks Rank #1.

Interestingly, shares of Health Insurance have gained 22.7% year to date compared with the industry’s growth of 15.0%.

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