The insurance companies grapple with a volatile market condition, which includes regulatory reforms, rapidly changing climatic conditions and the palpable disagreement among the Fed officials over how quickly to raise interest rates. Given this scenario, picking the prospective winning stocks and making a prudent investment decision for the best returns may seem an uphill task.
Interest Rates Rising — Apparent Boon?
At the long-awaited annual central banking conference in Jackson Hole, WY on Aug 25, there were no hints dropped about the next interest hike. The Federal Reserve had earlier indicated about three hikes in 2017, of which, two have already been made. Lack of signals about the next rate hike’s announcement was interpreted as ‘dovish’ by the markets.
Nonetheless, the slowly improving interest rate brings hope for insurers to which, they are sensitive.
The slowly but steady rise of interest rates would positively impact the insurance companies. As a result, life insurers, having suffered spread compression on products like fixed annuities and universal life due to persistently low rates, get a breather. While non-life insurers’ investment income has already been improving.
With the insurers being connected to interest rates, the current stiff monetary policy has started benefitting 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.
Factors Beyond Interest Rates
A reviving housing market is anticipated to enhance insurable exposures and premiums written. But we wait and see if this momentum continues in the near term as well. Additionally, an improving employment scenario and a positive consumer sentiment raise optimism.
However, growth prospects might be curbed with catastrophe losses. This year witnessed catastrophe losses such as, Cyclone Debbie, U.S. weather-related events and the recently occurred Hurricane Harvey. Such disastrous events will hurt the insurers’ underwriting margins. But there is still a ray of hope as insurers can think of raising prices that remained flat owing to a not so active catastrophe environment.
Amid rising yet low-interest rates and an improving economy, the insurers will still experience growth as they are capable of reaping profits through underlying strength and business modification.
We narrowed down to four insurers, well-positioned to capitalize on the industry’s positive trends. You may add these stocks to your portfolio for better returns.
We fine tune our search using price performance that outperformed the industry year to date, Zacks Ranks #1 (Strong Buy) and #2 (Buy), positive estimate revisions as well as positive surprises in the last three quarters.
Based on the above criteria, we have shortlisted four stocks you may want to consider:
Cincinnati, OH-based American Financial Group, Inc. (AFG - Free Report) offers property and casualty insurance products in the United States. The Zacks Consensus Estimate for earnings per share moved up 3.3% to $6.80 for 2017 and 1.8% to $6.75 for 2018 over the last 60 days. This is reflected through the company’s Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Its average three-quarter surprise is 23.1%. The long-term growth is pegged at 6.30%.
Shares of American Financial have rallied 15.5% year to date compared with the industry’s increase of 9.4%.
Santa Ana, CA-based First American Financial Corporation (FAF - Free Report) offers financial services. The Zacks Consensus Estimate increased 9.2% to $3.44 for 2017 and 6.4% to $3.66 for 2018 over the last 60 days. The company’s bullish rank (Zacks Rank #2) supports this. Its average three-quarter surprise is about 13%. The long-term growth is pegged at 13.0%, somewhat better than the industry average of 10.3%.
Shares of First American Financial have surged 33.9% year to date ahead of the industry’s gain of 9.4%.
West Des Moines, IA-based American Equity Investment Life Holding Company (AEL - Free Report) develops and sells fixed index and fixed rate annuity products in the United States. The Zacks Consensus Estimate moved up 6.1% to $2.60 for 2017 and 3.1% to $2.63 for 2018 over the last 60 days. The company’s Zacks Rank #2 substantiates this. The company surpassed estimates in three of the last four quarters with an average beat of 14.9%.
Shares of American Equity Investment have gained 23.1% year to date, outperforming the industry’s 16.3% growth.
Chicago, IL-based Kemper Corporation (KMPR - Free Report) offers property and casualty, plus life and health insurance to individuals and businesses in the United States. The Zacks Consensus Estimate climbed 20.1% to $1.67 for 2017 and 6.9% to $2.63 for 2018 over the last 60 days. This is represented by the company’s its Zacks Rank #1. The company’s average three-quarter surprise is 73%.
Shares of Kemper Corporation have gained 8.1% year to date compared with the industry’s 2.4% rise.
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