The Zacks Analyst Blog Highlights W. R. Berkley, Cincinnati Financial, American Financial Group, RLI and MetLife
For Immediate Release
Chicago, IL – June 17, 2022 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: W. R. Berkley Corp. WRB, Cincinnati Financial Corp. CINF, American Financial Group Inc. AFG, RLI Corp. RLI and MetLife Inc. MET.
Here are highlights from Thursday’s Analyst Blog:
Top 5 Insurance Stocks to Play a Higher Interest Rate Regime
U.S. stock markets closed sharply higher on Wednesday after the Fed announced the largest hike in the short-term lending rate since 1994. The central bank has also reiterated its monetary stance to aggressively fight mounting inflation without pushing the economy into a recession.
A shift in Fed policies toward a more hawkish stance is expected to benefit the overall financial sector. We have selected five insurance stocks with a favorable Zacks Rank that are likely to gain from a higher market interest rate. These are — W. R. Berkley Corp., Cincinnati Financial Corp., American Financial Group Inc., RLI Corp. and MetLife Inc.
Fed Hikes Interest Rate In Line With Expectations
On Jun 15, in his post-FOMC statement, Fed Chairman Jerome Powell said that the central bank has decided to raise the benchmark lending rate by 75 basis points effective immediately. With this, the Fed funds rate increased to 1.5-1.75% compared with 0-0.25% at the beginning of this year.
Powell hinted that the Fed could raise the interest rate by another 50 to 75 basis points in July. According to the "dot plot" — which gives individual Fed members expectations — the median value of the benchmark interest rate can go up to 3.4% at the end of 2022 compared with 1.9% projected in March FOMC.
The Fed Chairman has reiterated his commitment to fight inflation aggressively and to bring it down near to the central bank's targeted 2% without forcing the economy to go into a recession. However, the Fed cut its outlook for 2022 GDP growth to 1.7% from 2.8% in March. The unemployment rate, which is currently at 3.6%, is expected to climb to 4.1% in 2024. The Fed fund rate is expected to rise to 3.8% at the end of 2023.
The projection for the PCE price index – the Fed's favorite gauge of inflation – was raised to 5.2% from 4.3% in March. Core PCE inflation was projected to rise to 4.3% from 4.1% in March. However, PCE and core PCE inflation are expected to come down to 2.6% and 2.7%, respectively, in 2023.
Insurance Industry to Gain
A major part of the financial sector is the insurance industry. It consists of life insurers, property and casualty insurers, accident and health insurers, multiline insurers, and insurance brokerage firms.
A massive rise in the market interest rate will raise the cost of funds, enabling the financial companies to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the financial sector's profit margin.
Insurance providers are generally compelled to hold lots of long-term safe bonds to back the policies that are written. A higher interest rate will benefit insurance companies. The spread between the longer-term assets and shorter-term liabilities will increase the spread of insurers. Moreover, the insurance industry's profitability has risen historically during the period of rising interest rates.
Our Top Picks
We have narrowed our search to five insurers that saw positive earnings estimate revisions within the past 60 days. These insurers are regular dividend payers, which will act as an income stream during the market's downturn. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
W. R. Berkley has been benefiting from its insurance business, performing well on the increase in premiums written over the past many years. W. R. Berkley has been investing in numerous startups since 2006 and has established new units in growing international markets.
W. R. Berkley's international business is poised for growth supported by the emerging markets. WRB's solid capital position enables capital deployment. Investment in alternative assets should help improve investment income going forward.
The Zacks Consensus Estimate for current-year earnings of Zacks #1 Ranked W. R. Berkley has improved 6.5% over the past 60 days. WRB has a current dividend yield of 0.52%.
RLI is one of the industry's most profitable property and casualty writers with an impressive record of underwriting profits. A strong local branch-office network, a broad range of product offerings and its focus on specialty insurance lines contribute to RLI's profits.
Maintaining the combined ratio at favorable levels even in the toughest operating environment reflects superior underwriting discipline. RLI's decision to drop underperforming products from its property business also bodes well. Its strong capital position provides financial flexibility to operating subsidiaries.
The Zacks Consensus Estimate for current-year earnings of Zacks #1 Ranked RLI has improved 0.7% over the past 30 days. RLI has a current dividend yield of 0.93%.
Cincinnati Financial continues to increase premiums through a disciplined expansion of Cincinnati Re as the division makes a nice contribution to its overall earnings. Price increases and a higher level of insured exposures are the other positives.
Cincinnati Financial is focused on earning new businesses by appointing new agencies and believes that an agent-focused business model will drive long-term premium growth. CINF boasts a solid capital position based on which it has returned value to its shareholders. A favorable reserve release should drive growth for Cincinnati Financial. Consistent cash flow and sufficient cash balances will continue to boost liquidity.
The consensus estimate for current-year earnings of Zacks #2 Ranked Cincinnati Financial has improved 3.6% over the past 60 days. CINF has a current dividend yield of 2.37%.
American Financial Group is an insurance holding company, which provides specialty property and casualty insurance products in the United States. AFG is actively involved in startups, small-to-medium sized-acquisitions, and product launches.
Better industry fundamentals, a high renewal ratio, and a favorable combined ratio should drive growth. A solid capital position enables American Financial Group to deploy capital effectively. Consistent price increases in the property and casualty business should favor results. AFG boasts impressive inorganic growth and is prudently investing in businesses.
The Zacks Consensus Estimate for current-year earnings of Zacks #2 Ranked American Financial Group has improved 9.8% over the last 60 days. AFG has a current dividend yield of 1.70%.
MetLife continues to be driven by exceptional private equity returns, an ongoing expense discipline and the benefits of its diverse market-leading businesses and capabilities. MET's liquidity and investment portfolios are strong, resilient and position it well for success.
Several accretive acquisitions led to business diversification. Business streamlining has aligned the company with high-growth operations. MetLife's strong balance sheet supports shareholder value-boosting efforts through share buybacks and dividend payments.
The Zacks Consensus Estimate for current-year earnings of Zacks #2 Ranked MetLife has improved 0.7% over the past 30 days. MET has a current dividend yield of 3.23%.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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