3 Insurance Picks for the Coming Rate Hike

Indications that the Fed will hike rates have been gaining ground for some time now. Market watchers are not expecting a firm decision on rates from this week’s Fed meeting.

However, what could emerge from the Fed’s policy statement is the pattern of how such increases will take place. Among those sectors expected to gain from an interest rate hike are insurers. Stocks from this sector have also been chalking up significant gains this year.

Hike Unlikely After Meeting

Several economic reports released early this month have been extremely encouraging. Notable among them are the improving jobs data. The US economy created a total of 280,000 jobs in May, the highest number of job additions since December 2014.

However, such data is unlikely to result in a rate hike announcement this week. Despite Fed Chair Janet Yellen’s assertions that dismal growth during the early part of the year was likely an outcome of harsh winter weather, the Fed probably only wants to raise the key rate once growth is on firm footing.

This is because a combination of sluggish growth and higher interest rates would severely impact borrowing at several levels. This encompasses both corporate lending and loans taken for expenditure on housing and other household items requiring significantly high expenditures.

Gradualist Approach

To avoid such a scenario, Yellen has insisted that any set of increases will be gradual in nature. In March, the Fed Chair added that she and other Federal Open Market Committee members believe a “gradual rise in the federal funds rate” would be the correct approach “over the next few years.” In May, Yellen reemphasized that any rate hikes would be gradual in nature.

There are several reasons for taking such an approach. This includes 2013’s “taper tantrum," which occurred after the Fed indicated it was considering ending its bond purchase program. The fallout of such signals was investor panic which led to a spike in long-term rates and severe damage to emerging markets. Sluggish growth at the beginning of the year has compounded the Fed’s resolve to adopt such an approach.

Schedule for Increases

So what we might expect from this week’s meeting is an indication of when and how the Fed will raise rates. This is because only 4 policy meetings remain this year. In March, a vast majority of Fed officials said they expect a rate hike this year. It is likely that this week’s survey will reveal similar findings.

Possibly the most significant piece of information which might emerge is the “dot plot” of rates going ahead. The Fed’s “dot plot” tracks what Fed officials think rates should be at the end of the year. This is the best indication of where interest rates could be headed based on the opinion of all key Fed decision makers. Economists believe that this the best short-term indicator of the timing of such a move.

Insurers to Gain

One particular beneficiary of higher rates is the insurance industry. This is because they take in premiums from customers, invest them—usually in fixed income securities—and then pay out claims in the future. As the Fed raises the key rate, bonds yields will increase across the board. Insurers can then invest their premiums and receive higher yields. More investment income will then be generated, which will boost profits

This year, life insurance stocks included in the Financial Sector Select SPDR Fund (XLF - ETF report) have gained around 4.5%. Metlife (MET - Analyst Report), Prudential Financial (PRU - Analyst Report) and Unum Group (UNM - Analyst Report) have increased 7.6%, 5.8% and 6.2%, respectively. Nearly 15 of the 22 insurance stocks which are part of the XLF have experienced gains with an average return of approximately 3%.

Our Choices

Finding a great value stock can be a tough task. But thanks to our new style score system we have been able to identify a few growth stocks which have incredible potential in the near term.

Our research shows that stocks with Value Style Scores of ‘A’ or ‘B’ when combined Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) offer the best investment opportunities in the value investing space.

Sun Life Financial Inc. (SLF - Analyst Report) provides protection and wealth management products and services to customers worldwide. It carries out its US operations through 3 business units, the Employee Benefits Group, Annuities, and Individual Insurance.

Sun Life Financial holds a Zacks Rank #1 (Strong Buy) and has a Value Style Score of ‘B.’ The company has expected earnings growth of 9.7% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.50.

Manulife Financial Corporation (MFC - Analyst Report) provides life and long-term care insurance products and services in the U.S. Manulife derives the majority of its revenues from the US market.

Apart from a Zacks Rank #2 (Buy), Manulife has a Value Style Score of ‘A.’ The company has expected earnings growth of 26% for the current year and a P/E (F1) of 13.01x.

StanCorp Financial Group Inc. (SFG - Analyst Report) is one of the largest providers of employee benefits products and services in the US. The company operates across the country, with a dominant position in the western part of the US.

StanCorp Financial holds a Zacks Rank #2 (Buy) and has a Value Style Score of ‘B’. The company has expected earnings growth of 6.8% for the current year and a P/E (F1) of 13.81x.

With a rate hike getting closer, yields are likely to spike again. Insurers will clearly gain from this and they have experienced a good year til now. This is why these stocks would make prudent additions to your portfolio.

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