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3 Top Dividend Stocks in Insurance Space to Consider Now

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Plagued with the ongoing malaise due to a flurry of hurricanes and other catastrophes, the insurance industry seems to have lost much of its sheen to the investors at large. Their sentiments got further dampened by the Fed’s announcement to keep the interest rate unchanged at its most recently held meeting.

Havoc Wreaked by Weather Related Events

Having been blessed by Mother Nature for many years now, the insurance industry has of late faced its immense wrath. Although benign catastrophes in recent years had favored the property and casualty players, their severities took a worse turn with a slew of hurricane strikes namely, Harvey, Irma, Maria, affecting parts of the United States one after another.

Economic losses from Irma are estimated at about $58-$83 billion while the same from Harvey could be as high as $108 billion by Moody’s Analytics. Catastrophe modeling firm AIR Worldwide estimates industry insured losses for Maria in the Caribbean between $40 billion and $85 billion.

The AIR Worldwide firm has also provided an insurance industry loss projection following the huge impact of the 8.1 magnitude earthquake that hit Mexico in early September. The figure enormously ranges between $0.8 billion and $1.1 billion. Per the same global catastrophe risk modeler, the industry loss estimate is expected up to $2.1 billion, following another tremor that rocked Mexico on Sep 19, 2017.

These losses are anticipated to create a dent in underwriting margins for the property and casualty insurers. Insurer The Allstate Corp. (ALL - Free Report) expects to incur a catastrophe (cat) loss of $593 million pretax ($385 million after tax) from Harvey.

Another player, Infinity Property and Casualty Corporation, expects to suffer approximately $10-$15 million of weather-related loss.

Low Interest Rates Add to Woes

Interest rates are like a double-edged sword for the property and casualty insurers. Though low interest rates protect the value of bonds in their investment portfolio, it takes a toll on their investment yields. An increase in interest rates leads to higher investment income, which is another source of revenue for insurers.

A near-zero interest rate from past many years has eaten into the insurers net investment income pie. Despite the rate hikes by the Fed (unchanged at the meeting concluded last month), interest rates remain pretty abnormally low to contribute meaningfully to investment income.

Other headwinds the industry grapples with are soft pricing and stiff competition, prompting insurers to relax their rigid underwriting standards in order to gain more business. This exposes them to higher probability of incurring claim cost.

How to Gamble With the Stocks for Survival

The uncertainty phase persisting in the industry makes it difficult for investors to pick up the right stock to invest in.

The safest stock in this backdrop would be the one providing a steady stream of income. Significantly, the still-low interest rate scenario makes the dividend stocks a solid choice for investors looking for a steady benefit.

A stock rewarding shareholders with consistent dividends would be the top stock pick in such a scenario.

Here are some stocks that qualify our criteria:

Aflac Inc. (AFL - Free Report) has a Zacks Rank #3 (Hold). Notably, 2017 marks the 35th year of consecutive dividend growth. Its current dividend yield of 2.1% exceeds the industry’s metric of 1.9% that it belongs to.

We expect the company to continue with the dividend growth path, backed by a favorable U.S business and a strong balance sheet.  Though the company is facing weakness in Japan business, chances are slim that its dividend policy will be affected by it.

Cincinnati Financial Corp. (CINF - Free Report) has increased dividend for 56 consecutive years, an impressive feat achieved by only seven other U.S. public companies. It carries a Zacks Rank #2 (Buy). Its dividend yield of 2.6% outpaces the industry’s 0.5% yield. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.       .   

There is no question of the company to deviate from the dividend growth track, given its strong diversified business, wide agent network, disciplined underwriting and a strong balance sheet, which should support future dividend growth.

Old Republic International Corp. (ORI - Free Report) carrying a Zacks Rank #3, has raised dividend for 35 consecutive years. Its dividend yield of 3.9% is amply higher than the industry’s 1.9% tally.

The company’s diversified revenue and earnings from general P&C and title insurance subsidiaries, good profitability, moderate use of financial leverage and high cash flow assure us of an impressive dividend growth story to continue in the long term.

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