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The recent December FOMC meeting brought relief for investors who were eagerly waiting for even a slight increase in the interest rate. The Fed increased the rate by 25 basis points to a range of 0.50–0.75%, effective Dec 15, 2016.
Notably, the interest rate hike comes after a year. When the Fed had increased the interest rate last December, investors had expected four more increases in 2016. However, the Fed reduced the median forecast for the number of rate hikes this year to two from four at its March meeting. Thereafter, it indicated a possibility of only one hike this year at its June meeting.
Nonetheless, investors could finally breathe a sigh of relief as the Fed raised interest rates at the December FOMC meeting. The rate hike reflectes the improving employment picture and price stability. While about 2.25 million net new jobs created and a decline in unemployment, the inflation rate is nearing the long-term target of 2%.
Interestingly, the Fed had indicated three rate hikes in 2017 at its last concluded FOMC meeting. It projects median unemployment rate of about 4.5% in the next three years and median inflation of about 1.5% in 2016, 1.9% in 2017 and 2% in 2018 and 2019. According to the Fed, the median projection for interest rate is 1.4% by 2017 end, 2.1% by 2018 end, and 2.9% by 2019 end.
Though the rate hike may be unfavorable for some sectors, the Insurance industry is among those that stand to benefit from the same. 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 form 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 sustained 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.
Stocks Pick
Making prudent investment decision can be an uphill task. Hence, we have zeroed in on three insurers that are worth investing in amid a higher interest rate environment. As parameters we have chosen value stocks that have witnessed 2% or more in estimate revisions, favorable Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold), and lower price/earnings (P/E) ratio. A value stock implies stocks trading lower than their fair value or intrinsic value, which can therefore offer a significant upside potential.
MGIC Investment Corp. (MTG - Free Report) the largest private mortgage insurer in the U.S. has a Value Score of B. The stock witnessed 2.13% increase in its 2017 estimate revision in the last four weeks. The P/E ratio of 12.1 is lower than the industry P/E ratio of 13.8, while its return on equity of 16.6% is higher than the industry average of 5.2%. Its PEG ratio of 1.64 is also lower than the industry PEG ratio of 2.96. MGIC Investment carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Everest Re Group Ltd. , a writer of property and casualty, reinsurance and insurance in the U.S, Bermuda and international markets, has a Value score of A. The stock witnessed 2.02% increase in its 2017 estimate revision in the last four weeks. The P/E ratio of 12.0 is much lower than the industry P/E ratio of 29.2, while its return on equity of 12.5% is higher than the industry average of 7%. Everest Re carries a Zacks Rank #3.
OneBeacon Insurance Group, Ltd. (OB - Free Report) , a provider of specialty property and casualty insurance products and services, has a Value score of B. The stock witnessed 2.40% increase in its 2017 estimate revision in the last four weeks. The P/E ratio of 19.2 is much lower than the industry P/E ratio of 29.2, while its return on equity of 8.7% is higher than the industry average of 7%. OneBeacon carries a Zacks Rank #2.
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3 Insurance Stocks Worth Investing in 2017
The recent December FOMC meeting brought relief for investors who were eagerly waiting for even a slight increase in the interest rate. The Fed increased the rate by 25 basis points to a range of 0.50–0.75%, effective Dec 15, 2016.
Notably, the interest rate hike comes after a year. When the Fed had increased the interest rate last December, investors had expected four more increases in 2016. However, the Fed reduced the median forecast for the number of rate hikes this year to two from four at its March meeting. Thereafter, it indicated a possibility of only one hike this year at its June meeting.
Nonetheless, investors could finally breathe a sigh of relief as the Fed raised interest rates at the December FOMC meeting. The rate hike reflectes the improving employment picture and price stability. While about 2.25 million net new jobs created and a decline in unemployment, the inflation rate is nearing the long-term target of 2%.
Interestingly, the Fed had indicated three rate hikes in 2017 at its last concluded FOMC meeting. It projects median unemployment rate of about 4.5% in the next three years and median inflation of about 1.5% in 2016, 1.9% in 2017 and 2% in 2018 and 2019. According to the Fed, the median projection for interest rate is 1.4% by 2017 end, 2.1% by 2018 end, and 2.9% by 2019 end.
Though the rate hike may be unfavorable for some sectors, the Insurance industry is among those that stand to benefit from the same. 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 form 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 sustained 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.
Stocks Pick
Making prudent investment decision can be an uphill task. Hence, we have zeroed in on three insurers that are worth investing in amid a higher interest rate environment. As parameters we have chosen value stocks that have witnessed 2% or more in estimate revisions, favorable Zacks Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold), and lower price/earnings (P/E) ratio. A value stock implies stocks trading lower than their fair value or intrinsic value, which can therefore offer a significant upside potential.
MGIC Investment Corp. (MTG - Free Report) the largest private mortgage insurer in the U.S. has a Value Score of B. The stock witnessed 2.13% increase in its 2017 estimate revision in the last four weeks. The P/E ratio of 12.1 is lower than the industry P/E ratio of 13.8, while its return on equity of 16.6% is higher than the industry average of 5.2%. Its PEG ratio of 1.64 is also lower than the industry PEG ratio of 2.96. MGIC Investment carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Everest Re Group Ltd. , a writer of property and casualty, reinsurance and insurance in the U.S, Bermuda and international markets, has a Value score of A. The stock witnessed 2.02% increase in its 2017 estimate revision in the last four weeks. The P/E ratio of 12.0 is much lower than the industry P/E ratio of 29.2, while its return on equity of 12.5% is higher than the industry average of 7%. Everest Re carries a Zacks Rank #3.
OneBeacon Insurance Group, Ltd. (OB - Free Report) , a provider of specialty property and casualty insurance products and services, has a Value score of B. The stock witnessed 2.40% increase in its 2017 estimate revision in the last four weeks. The P/E ratio of 19.2 is much lower than the industry P/E ratio of 29.2, while its return on equity of 8.7% is higher than the industry average of 7%. OneBeacon carries a Zacks Rank #2.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research. See the stocks free>>