Trade wars, economic woes and weakness in the global economy have increased the appeal for U.S. bonds as a safe haven, leading to a decline in its yields. The concern, however, remains the fact that the yield curve, a curve of interest rate of varying maturities, has shown an inversion. This means that long-term rates are lower than the short-term ones.
An inversion of yield curve is a leading indicator of a recession and central banks generally adopt a soft stance, which is a rate cut, to address it. So far this year, the Fed has not taken any action in its monetary policy, thus keeping Fed funds unchanged at a low level of 2.25-2.50% range, which is a diversion from its December 2018 forecast of instituting two rate hikes in 2019.
Low interest rates are unfavorable for industries such as banks and insurance. Banks suffer from compression in net interest margin and insurers are hit by low investment yields on their investment portfolio.
However, net investment income is one of the drivers of revenues, the other major being insurance premiums. Due to increase in premium pricing in many insurance lines like personal and commercial in recent months, the industry is gaining.
The Insurance ETF (KIE), which comprises of 48% of property and casualty insurers, is up 14.9% year to date compared with S&P 500 gains of 9.6%. Thus investing in some good quality insurance stocks, despite the prevailing low interest rate, doesn’t seem a bad option.
What is Causing Market Volatility and Yield Inversion?
A recent tweet from President Donald Trump pointed at 5% tariff on all goods coming into the United States from Mexico starting Jun 10, until illegal migration from Mexico stops. This was enough to spook Wall Street.
Trump added that if the illegal immigration crisis persists, the tariffs will be hiked to 10% on Jul 1, and by another 5% every consecutive month, up to 25% by Oct 1. Tariffs will permanently remain at the 25% level until Mexico stops the illegal inflow of immigrants.
The tariffs will hurt the U.S economy since Mexico is its third-largest trade partner, with $346.5 billion of goods imported from the region last year.
Moreover, the Sino-U.S trade spat is still raging, with a crackdown on China’s Huawei and other technology companies. China is fighting back by curbing access of its rare earth to the United States. With no talks between the two nations on the anvil, things don’t look any bright now. This has been one of the major unnerving factors for the markets for some time now.
Various market participants are of the opinion that these trade wars might dent the American economy and compel the Federal Reserve to slash interest rate to boost growth.
Currently the 10-year Treasury bond rate is 2.092%, which is lower than the 3-month Treasury bond rate of 2.354%. The difference between 3-month and 10-year bond rate is the most-watched indicator of recession.
In a year's time the Zacks Property and Casualty Insurance industry has gained 3.10% against decine of 0.9% in the Zacks S&P 500 composite.
Insurance Industry on Solid Footing
Keeping aside the low interest rate concern, the insurance industry seems to be on a solid footing with increase in revenues due to hike in premium rates across most of insurance lines. In the first quarter of 2019, in personal lines, insurance homeowners, automobile and personal articles saw rate increase of 2%, 2.5% and 1%, respectively. In Commercial lines, most of the lines saw premium rate increase of 2%, while Commercial Auto saw a 7% rate increase. A rise in premium rates, which is expected to continue, should lead to top-line growth.
Also, the industry boasts good policy holders’ surplus, which is insurers’ excess of assets over liabilities. This indicates that the industry remains well capitalized and financially prepared to pay for large-scale losses in 2019 and beyond. This surplus capital should also fuel increased consolidation in the industry as players seek to increase market share, achieve geographical diversification, change product mix and growth in niche areas.
The industry is witnessing increased use of technology, like blockchain, AI, advanced analytics, telematics, cloud-computing and robotic process automation to expedite business operations and save unnecessary delay and cost.
4 Stocks to Bet on
We have shortlisted some of the stocks with a favoravle Zacks Rank and having witnessed an upward revision in earnings estimates.
Cincinnati Financial Corp. (CINF - Free Report) is a Fairfield, OH-based property casualty insurance provider with a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2019 EPS has increased 0.6% over the past 60 days. In a year’s time, the stock has gained 41.9%.
You can see the complete list of today's Zacks #1 Rank stocks here .
National General Holdings Corp. (NGHC - Free Report) is a New York-based specialty personal lines insurance holding company with a Zacks Rank of 2. The consensus mark for 2019 EPS has increased 1.1% over the past 30 days.
American Financial Group, Inc. (AFG - Free Report) , based in Cincinnati, OH, is engaged primarily in property and casualty insurance, focusing on specialized commercial products for businesses, and in sale of traditional fixed and fixed-indexed annuities. The Zacks Consensus Estimate for 2019 EPS has moved nearly 0.5% north over the past 30 days. The stock currently carries a Zacks Rank #2.
CNA Financial Corp. (CNA - Free Report) is engaged in property and casualty industry and sale of life insurance products. The Zacks Consensus Estimate for 2019 EPS has moved nearly 3% north over the past 60 days. The stock currently carries a Zacks Rank #2.
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