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Top 5 Picks From S&P 500's Best Sector in the Past Month

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Wall Street reeled under volatility in the last three trading days. A few weak economic data, the resurgence of the Delta string of coronavirus and the Fed's signal of a possible tapering of its quantitative easing program starting this year dented investors' confidence.

However, the fundamentals of the U.S. economy stay solid and the overall trend of the market remains encouraging. The U.S. economy is going through a robust recovery despite the threat of the Delta strain of coronavirus and mounting inflation.

Most parts of the U.S. economy have already reopened. The Dow and the S&P 500 registered all-time highs on Aug 16 and the Nasdaq Composite posted an all-time high on Aug 5.

The Financial Select Sector SPDR (XLF), one of the 11 broad sectors of the benchmark S&P 500 Index, was the best performer in the past month rising 6.7%.

Near-Term Drivers

A major part of the financial sector is the insurance industry, consisting of life insurers, property and casualty insurers, accident and health insurers, multiline insurers, and insurance brokerage firms. The Fed's FOMC meeting minutes of July revealed that growing support within Fed officials to start tapering the $120 billion per-month bond-buying program from as early as October.

The central bank is currently buying $80 billion of Treasury Notes and $40 billion of mortgage-backed securities per month as monetary stimulus owing to the pandemic. A reduction in bond buying will push bond prices down. This will increase the yield to maturity of bonds. Higher bond yields will raise the market's risk-free returns.

Insurance is generally compelled to hold lots of long-term safe bonds to back the policies that are written. A higher yield of bonds will benefit insurance companies. The spread between the longer-term assets and shorter-term liabilities will increase the spread of insurers. The profitability of the insurance industry rose historically during the period of rising interest rates.

The U.S. economy grew 6.3% and 6.5% in the first and the second quarters of 2021, respectively. Moreover, in absolute term, U.S. GDP in second-quarter 2021 exceeded the pre-pandemic level. Per the estimate projected by several globally renowned financial agencies and investment bankers, the U.S. economy is expected to grow 6.5-7% on average in 2021.

Although pandemic-led challenges weigh on the performance of insurers, product diversification, improved pricing, prudent underwriting, increased exposure, adoption of technology and a solid capital position should continue to drive the industry.

Diversification of business, the addition of capabilities, and expansion of global presence alongside growth in niche markets should add to the upside. Moreover, insurers are increasingly adopting technologies like AI, robotic process automation, cognitive intelligence, advanced analytics, telematics, blockchain and cloud computing.

This helps in managing costs and expanding margin. Many life insurers have started selling policies online that appeal to the tech-savvy population.

Our Top Picks

We have narrowed down our search to five large-cap (market capital > $15 billion) insurers that have strong growth potential for the rest of 2021 and saw positive earnings estimate revisions within the last 30 days.

These companies are regular payer of dividend, which may act as an income stream during the market's downturn. These stocks have gained more than 25% year to date. 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.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

American International Group Inc. (AIG - Free Report) has been streamlining its core insurance operations thereby enhancing capital allocation and operating leverage. It has acquired Ellipse, a specialist provider of group life risk protection in the UK, from Munich Re.

The transaction strengthens the company's  position in Life & Retirement businesses. The buyout of Validus Holdings, Ltd. and Glatfelter Insurance Group, also strengthened its global General Insurance business.

This Zacks Rank #1 company has an expected earnings growth rate of 91.3% for the current year. The Zacks Consensus Estimate for current-year earnings improved 10.3% over the last 7 days. The stock has a current dividend yield of 2.4%. The stock price has jumped 39.9% year to date.

Cincinnati Financial Corp. (CINF - Free Report) continues to grow premiums through a disciplined expansion of Cincinnati Re while the division makes a nice contribution to its overall earnings. Price increases and a higher level of insured exposure are its positives.

The company is focused on generating new business by appointing new agencies and believes that its agent-focused business model will drive long-term premium growth.

This Zacks Rank #1 company has an expected earnings growth rate of 47% for the current year. The Zacks Consensus Estimate for current-year earnings improved 6.3% over the last 30 days. The stock has a current dividend yield of 2.1%. Year to date, the stock price has climbed 39.3%.

Marsh & McLennan Companies Inc. (MMC - Free Report) is a professional services company that provides advice and solutions to its clients in the areas of risk, strategy, and people worldwide. The company operates in two segments —  Risk and Insurance Services, and Consulting.

Its operating performance has been favorable for the past many years, driven by its diverse product offerings, a wide geographic footprint and strong client retention.

This Zacks Rank #2 company has an expected earnings growth rate of 22.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 7.1% over the last 30 days. The stock has a current dividend yield of 1.4%. The stock price has rallied 31.6% year to date.

MetLife Inc. (MET - Free Report) is performing well on prudent underwriting and expense management. Several accretive acquisitions led to business diversification and inorganic growth. Business streamlining over the years via divestitures have aligned the company with high-growth operations. It continues to focus on businesses with growth potential and fix or exit businesses that do not create value.

This Zacks Rank #2 company has an expected earnings growth rate of 29.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 10.8% over the last 30 days. The stock has a current dividend yield of 3.2%. Year to date, the stock price has surged 28.4%.

Aflac Inc. (AFL - Free Report) continues to maintain strong risk-adjusted capital at its operating subsidiaries supported by consistent earnings and good liquidity. Its U.S segment is poised to grow from the buyout of Argus Dental and Vision and Zurich North America's U.S. Corporate Life and Pensions (Group Benefits) business. A robust product pipeline for 2021 is likely to boost the segment’s sales going forward.

This Zacks Rank #2 company has an expected earnings growth rate of 12.7% for the current year. The Zacks Consensus Estimate for current-year earnings improved 6.6% over the last 30 days. The stock has a current dividend yield of 2.3%. The stock price has advanced 25.8% year to date.