Top 5 Insurance Stocks to Gain From Fed's Likely Rate Hike

Fed officials are scheduled to meet for this year's most crucial FOMC meeting from Mar 15-16. The central bank is set to raise the benchmark interest rate in this FOMC meeting, for the first time since March 2020. The investors’ community is 100% sure of a rate hike rate hike in March but market participants are currently guessing the magnitude of it.

A likely shift in Fed policies toward a more hawkish stance is expected to benefit the overall financial sector. We have selected five insurance stocks with a favorable Zacks Rank that are likely to gain from a higher market interest rate. These are — W. R. Berkley Corp. WRB, Cincinnati Financial Corp. CINF, Raymond James Financial Inc. RJF, Everest Re Group Ltd. RE and Arch Capital Group Ltd. ACGL.

Fed to Take Tough Monetary Stance

On Jan 26, after the conclusion of the first Fed FOMC meeting of this year, Fed Chairman Jerome Powell indicated that the first rate hike in three years could be implemented as early as March. The central bank’s quantitative easing program will also end in March. In a separate press statement, the FOMC had also indicated that the Fed is thinking of shrinking its $9 trillion balance sheet later this year.

Meanwhile, several inflation indexes of January reached a 40-year high, triggering a large section of economists and financial researchers to predict a 50 basis-point hike in the benchmark lending rate in March instead of the market’s expectation of a 25 basis-point hike. Some investment bankers have also said that the central bank may raise interest rate seven times this year with a magnitude of 25 basis points each time.

Consequently, the yield on the benchmark 10-Year U.S. Treasury Note climbed more than 2%. The yield was 1.5% at the beginning of 2022. However, the recent geopolitical conflict and the invasion of Russia in Ukraine have compelled many economists and financial experts to think that the Fed may restrict itself to a 25 basis-point hike in interest rate. Nevertheless, market participants are sure that the first rate hike after the pandemic is coming in March.

Insurance Industry to Gain

A major part of the financial sector is the insurance industry. It consists of life insurers, property and casualty insurers, accident and health insurers, multiline insurers, and insurance brokerage firms.

A reduction in bond buying will push bond prices down. This will increase the yield to maturity of bonds. Higher bond yields will raise the market's risk-free returns. A hike in risk-free market interest rate will raise the cost of funds, enabling the financial companies to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the financial sector’s profits margin.

Insurance providers are generally compelled to hold lots of long-term safe bonds to back the policies that are written. A higher interest rate will benefit insurance companies. The spread between the longer-term assets and shorter-term liabilities will increase the spread of insurers. Moreover, the insurance industry's profitability has risen historically during the period of rising interest rates.

Our Top Picks

We have narrowed our search to five large-cap (market capital > $10 billion) insurers that saw positive earnings estimate revisions within the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Cincinnati Financial continues to increase premiums through a disciplined expansion of Cincinnati Re while the division makes a nice contribution to its overall earnings. Price increases and a higher level of insured exposures are the other positives.

Cincinnati Financial is focused on earning new businesses by appointing new agencies and believes that an agent-focused business model will drive long-term premium growth. Cincinnati Financial boasts a solid capital position based on which it has returned value to shareholders. Favorable reserve release should drive growth for CNF. Consistent cash flow and sufficient cash balances will continue to boost liquidity.

Cincinnati Financial has a negative expected earnings growth rate for the current year. However, the Zacks Consensus Estimate for current-year earnings has improved 5.7% over the last 30 days.

W. R. Berkley has been benefiting from its insurance business, performing well on the increase in premium written over the past many years. W. R. Berkley has been investing in numerous startups since 2006 and has established new units in growing international markets.

W. R. Berkley’s international business is poised for growth supported by the emerging markets. WRB’s solid capital position enables capital deployment. Investment in alternative assets should help improve investment income going forward.

W. R. Berkley has an expected earnings growth rate of 3.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last 30 days.

Raymond James is performing relatively well in an intensely competitive environment. Supported by a solid balance sheet position, RJF has been undertaking strategic acquisitions. These efforts are expected to help Raymond James enhance its service offerings, diversify revenues and expand its footprint globally.

RJF has an expected earnings growth rate of 4.3% for the current year (ending September 2022). The Zacks Consensus Estimate for current-year earnings has improved 5% over the last 30 days.

Everest Re’s global presence, product diversification and capital adequacy bode well. Higher premiums earned at the Insurance segment will likely improve the expense and loss ratio. The Reinsurance segment of RE remains well-poised for leveraging opportunities, stemming from continued disruption and evolution of the reinsurance market.

Strong capital position, with sufficient cash generation capabilities supporting effective capital deployment. Everest RE is lowering exposure to areas not meeting the right risk-return profile, building a portfolio with a mix toward product lines with better rate adequacy and higher long-term margins and repositioning portfolio by moving up fixed income credit quality.

Everest RE has an expected earnings growth rate of 15.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2% over the last 30 days.

Arch Capital boasts a strong product portfolio and has been maintaining an exemplary track record of premium growth. Premiums should benefit ACGL from new business opportunities; rate increases, growth in existing accounts and growth in Australian single premium mortgage insurance.

This apart, Arch Capital has been diversifying its Mortgage Insurance business via strategic acquisitions that complement the strength in the specialty insurance and reinsurance businesses. Solid capital position shields ACGL from market volatility. It effectively deploys capital to pursue growth initiatives. Strategic buyouts strengthen the portfolio of Arch Capital and offer geographic diversification.

ACGL has an expected earnings growth rate of 26% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3% over the last 30 days.

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W.R. Berkley Corporation (WRB): Free Stock Analysis Report
Cincinnati Financial Corporation (CINF): Free Stock Analysis Report
Everest Re Group, Ltd. (RE): Free Stock Analysis Report
Raymond James Financial, Inc. (RJF): Free Stock Analysis Report
Arch Capital Group Ltd. (ACGL): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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