The insurance industry seems well-poised for growth on the back of favorable operating conditions. Life insurers largely benefit from an improving rate environment owing to sensitivity to interest rates.
The Fed kept its promise of three interest rate hikes in 2017 and announced three more in 2018 as well as two in 2019. These moves reflect President Trump’s bias for higher interest rates and the central bank’s confidence in improving U.S. economy.
Though the rate is improving, it is still low and the magnitude is not enough to considerably benefit insurers. The life insurers have lowered exposure to interest-sensitive product lines and shifted to riskier asset like equities only to fetch in more returns from the policyholders’ claims. Nonetheless, improving investment income raises optimism in the stocks.
Gradual increase in interest rate will tend to lower hedging costs and coupled with control over underwriting expenses might further margin expansion.
Life insurers have redesigned and re-priced products, which should help write higher premiums.
Improving GDP (Fed predicts GDP to grow at 2.5% in 2018 and at 23.1% in 2019) and lowered unemployment rate (Fed expects it to decline to 3.9% both in 2018 and in 2019) among others indicate more disposable income with people opting for more insurance coverages.
On a positive note, the Life Insurance industry is ranked at #26, representing the top 11% of the Zacks Industry Ranks, having scaled by a notch from last week. This upswing was likely as there were three positive estimate revisions and none negative.
With respective to price performance, the industry has underperformed the S&P 500 index’s 18.6% rally in a year, registering 7% gain quarter to date. Nonetheless, the industry is undervalued at present.
Looking at its price-to-book ratio — the best multiple for valuing life insurers because of fluctuations in quarterly earnings — the industry has a trailing 12-month P/B ratio of 2.13, lower than the S&P 500’s 3.84. It is also trading near the low end of 1-year traded range of 2.10-2.40.
This seems the right time to invest in life insurance industry given its strong fundamentals, a favorable macro backdrop and undervaluation.
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We shortlisted four stocks backed by a bullish Zacks Rank, a solid Value Score and northbound estimates in the past 60 days. Shares of these companies have also outperformed the industry in a year.
Primerica, Inc. (PRI - Free Report) distributes financial products to middle-income households in the United States as well as Canada. The stock sports a Zacks Rank #1 (Strong Buy) and has a favorable Value Score of B. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 19.3% upward and moved 21.9% north for 2019 over the last 60 days.
Primerica also outpaced expectations in three of the last four quarters and has an expected long-term earnings growth rate of 10%. Shares gained 24.2%, outperforming the industry's increase of 7% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Reinsurance Group of America, Inc. (RGA - Free Report) engages in reinsurance business. The stock carries a Zacks Rank #2 and has an impressive Value Score of A. The Zacks Consensus Estimate for 2018 bottom line has moved up 10.9% and 10.3% north for the metric in 2019 over the last 60 days.
Reinsurance Group exceeded estimates in two of the last four quarters and has an 11% expected long-term earnings growth rate. Shares gained 25.5%, outperforming the industry's increase in a year.
Sun Life Financial Inc. (SLF - Free Report) provides protection and wealth products and services to individuals, businesses and institutions worldwide. The stock carries a Zacks Rank of 2 (Buy) and has a solid Value Score of A. The Zacks Consensus Estimate for 2018 has been raised 6.4% and moved 8.2% north for 2019 over the last 60 days.
Sun Life surpassed estimates in two of the last four quarters and has an expected long-term earnings growth rate of 7%. Shares gained 20.6%, outperforming the industry's increase in a year.
American Equity Investment Life Holding Co. (AEL - Free Report) develops and sells fixed index and fixed rate annuity products in the United States. The company is a Zacks #2 Ranked player, carrying a Value Score of A. The consensus mark for both 2018 and 2019 has been increased 11.5% over the last 60 days. American Equity Investment also outshined expectations in the trailing four quarters.Shares gained 20.6%, outperforming the industry's increase in a year.
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