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4 Solid Insurance Picks as Fed Makes Third Hike This Year

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The Federal Reserve has increased the interest rate for the third time in 2018. This comes as widely expected. With the latest raise of one-quarter percentage points at the last held FOMC meeting, the interest rate now stands at 2.5%. Concurrently, the Fed officials issued outlook for 2021.

Fed Chairman Jerome Powell stated that the economy has strengthened and the unemployment level remains low with inflation of the Fed’s 2% target, influencing the Central Bank to continue to effecting hikes in interest rates. Jerome Powell stated: “This is a good moment for the U.S. economy." The latest raise marks the eighth hike since the financial crisis.

Fed officials continue to expect one more hike in 2018 to take the interest rate to 2.4% as projected in its June FOMC meeting. With three hikes in 2019, the federal funds rate should be 3.1% for 2019 as previously estimated. The rate is still projected to be 3.4% for 2020 and remain at the same level for 2021. However, the same should be at 3% over the long haul, up from 2.9% predicted at the meeting held in June. The Central Bank foresees a single hike for 2020.

Major indexes, namely S&P 500, Nasdaq and Dow Jones Industrial Average have lost in yesterday’s trading session.

The Fed also provided an optimistic unemployment view.  Fed officials expect the unemployment rate at 3.7% for 2018 (up from 3.6% predicted earlier), 3.5% for both 2019 and 2020 and projects 3.7% in 2021. Over a longer term, unemployment rate is estimated at 4.5%. A spurt in employment shows an average of 0.2 million increase in jobs over the past three months. Per U.S. Bureau of Labor Statistics, unemployment rate was 3.9% in August and marked the 18-year low level while yearly wage growth was 2.9%, hitting a nine-year high level

Encouraging economic data instills hopes. The Fed now estimates GDP to rise 3.1% in 2018 and 2.5% for 2019, up from the June forecast of 2.8% and 2.4%, respectively. Expectations thereafter remain in line with the June projections of 2% in 2020 and 1.8% over the long term.  GDP is expected to be 1.8% for 2021. However, some economists fear that the United States’ trade war with China, Canada, Mexico and others could weigh on growth.

Inflation is expected to remain slightly above the targeted 2% through 2020, though the same will stay at 2% thereafter.

Although an improving rate environment comes as a piece of good news for some, for others, it’s just the opposite. Capital intensive industries feel the pinch as cost of capital rises. Meanwhile, banks and insurers remain major beneficiaries of a rising rate environment because of their sensitivity to interest rates.

Courtesy of the progressing rate environment, investment income — an important component of insurers’ top line — is also exhibiting an upward trend. This apart, tax rate overhaul, advancing economy, encouraging employment data and stringent underwriting standards infuse investors’ confidence in the stock.

4 Best in the Bracket

Amid an improving macro backdrop, investors always eagerly look to add stocks with strong fundamentals and potential to generate better yields.

It’s an intimidating task to zero in on a string of underpriced stocks with high-growth offerings. The Zacks Stock Screenermakes this work relatively simpler. We have shortlisted four insurers with an expected long-term earnings growth rate of 6% or more. The stocks also carry a favorable Value Score and Growth Score of A or B. Value Score helps investors identify the undervalued stocks. This deviation from their fair value is what creates an exceptional upside opportunity. Growth Score analyzes a company’s growth prospects and also evaluates its corporate financial statements.

Headquartered in Santa Ana, CA, First American Corporation (FAF - Free Report) engages in writing personal automobile insurance in the United States. The expected long-term earnings growth rate stands at 13%. The stock with an impressive Value Score of A and a Growth Score of B, carries a Zacks Rank #2 (Buy).   You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares have lost 7% versus the industry’s increase of 7.3% year to date.

Los Angeles, CA-based Mercury General Corporation (MCY - Free Report) provides financial services. The expected long-term earnings growth rate is pegged at 34.8%. The stock has a commendable Value Score and a Growth Score of A. It carries a Zacks Rank of 2.

Shares have declined 6.2% against the industry’s growth of 7.3% year to date.

Based in Branchville, NJ, The Selective Insurance Group, Inc. (SIGI - Free Report) provides insurance products and services in the United States. The expected long-term earnings growth rate is projected at 9.5%. The stock carries a Value Score and a Growth Score of B. It has a Zacks Rank #2.

Shares of the company have climbed 6.6% compared with the industry’s rise of 7.2% year to date.

Domiciled in Philadelphia, PA, Radian Group Inc. (RDN - Free Report) provides mortgage and real estate products and services in the United States. The expected long-term earnings growth rate stands at 5%. The stock carries a robust Value Score of A and a Growth Score of B. The company holds a Zacks Rank of 2.

Shares of the company have dipped 2.3%, narrower than the industry’s decrease of 5.8%.


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