U.S. stock markets are facing volatility in August. On Jul 26, the Fed raised the benchmark lending rate by 25 basis points to the range of 5.25-5.5%. This marked the highest range of the Fed fund rate since March 2001. The central bank reinitiated the rate hike regime after a pause in June, as the inflation rate remained elevated at almost double the Fed’s 2% target rate.
Fed’s July FOMC meeting minutes said majority of officials remained concerned that the general price level stayed elevated despite the central bank’s decision to adopt strict monetary control and aggressive interest rate hike policies in the last one and half years. Consequently, the minutes indicate the possibility of more rate hikes in the near future.
According to the minutes, “With inflation still well above the Committee’s longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”
Per the minutes, “In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time.”
Following the release of the minutes, yields on several U.S. government bonds spiked. On Aug 21, the yield on the short-term 2-Year U.S. Treasury Note rose to 5.005%. This yield is closely linked to the movement of the Fed fund rate. The yield on the benchmark 10-Year U.S. Treasury Note touched 4.35%, its highest since November 2007. This link is closely associated with the mortgage rate. The yield on the long-term 30-Year U.S. Treasury Note closed at 4.451%.
Insurance Industry to Gain
A massive rise in the market interest rate will raise the cost of funds, enabling financial companies to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the financial sector’s profit margin.
Moreover, higher bond yields will raise the market's risk-free returns. Insurance providers are generally compelled to hold lots of long-term safe bonds to back the policies that are written. A higher interest rate should benefit insurance companies.
The spread between the longer-term assets and shorter-term liabilities would increase the spread of insurers. The insurance industry's profitability has risen historically during periods of rising interest rates.
Our Top Picks
We have narrowed our search to five insurers with strong potential for the rest of 2023. These stocks have seen positive earnings estimate in the last 30 days. Each of our picks sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Assurant Inc. ‘s AIZ focus on inorganic and organic growth strategies bodes well for growth. For 2023, AIZ expects adjusted EBITDA, excluding reportable catastrophes, to increase by high single digits. Growth in Global Housing is being driven by improved performance in Homeowners, reflecting higher lender-placed net earned premiums. Global Lifestyle stands to gain from growth across Connected Living and Global Automotive.
Assurant has expected revenue and earnings growth rates of 4.1% and 13%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.1% over the last seven days.
Kinsale Capital Group Inc. KNSL continues to benefit from dislocation within the broader property/casualty insurance industry, rate increases and premium growth. Across the E&S market, KNSL’s products are exposed to those business lines, which have relatively lower risks.
Kinsale Capital boasts the lowest combined ratio among its specialty insurer peers while achieving the highest growth and targets the same in the mid-80s over the long term. KNSL has various reinsurance contracts to limit exposure to potential losses apart from arranging additional capacity for growth. Technological advancements have also been lowering expense ratios for quite some time.
Kinsale Capital has expected revenue and earnings growth rates of 48.3% and 47.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.6% over the last 30 days.
RenaissanceRe Holdings Ltd. RNR has witnessed steady premium growth over the past few quarters. This upside is quite obvious from its seven-year CAGR (2014-2022) of 25%. RNR has been focusing on acquisitions and business expansions to sustain growth prospects.
RNR has been undertaking divestitures to streamline its operations and get rid of low-return high-risk businesses. RNR’s balance sheet strength remains impressive. Its cash and cash equivalents are higher than its debt level. RNR is also engaged in the prudent deployment of capital.
RenaissanceRe has expected revenue and earnings growth rates of 18.6% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 9.2% over the last 30 days.
Arch Capital Group Ltd. ACGL boasts a strong product portfolio and has been maintaining an exemplary 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. A 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.
Arch Capital has expected revenue and earnings growth rates of 30.6% and 38.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.7% over the last 30 days.
Brown & Brown Inc. BRO has a compelling portfolio along with an impressive growth trajectory driven by organic and inorganic initiatives across all its segments. Buyouts and collaborations enhanced Brown & Brown's existing capabilities and extended its geographic foothold. Strategic efforts continue to drive commission and fees. BRO boasts a strong balance sheet backed by a solid cash position.
Brown & Brown has expected revenue and earnings growth rates of 17.6% and 18%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.2% over the last 30 days.
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