Top 5 Insurance Stocks to Gain From a Likely Hawkish Fed

Fed officials are scheduled to meet for the last FOMC meeting of this year to be held on Dec 14-15. On Nov 30, in his testimony before a Senate committee, Fed Chairman Jerome Powell said that the central bank will discuss speeding up the tapering process of its monthly bond-buy program in the upcoming FOMC meeting. The Fed believes that the current inflation is no longer transitory.

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 — Fidelity National Financial Inc. FNF, W. R. Berkley Corp. WRB, Cincinnati Financial Corp. CINF, Aflac Inc. AFL and Brown & Brown Inc. BRO.

Fed Likely to Take a Hawkish Stance

On Nov 30, Powell said that “At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

This means that the Fed strongly believes that the fundamentals of the U.S. economy are robust. Both consumer and business spending are strong despite mounting inflation and supply-chain disruptions. Manufacturing and services PMIs have stayed elevated. The struggling labor market is also showing a systematic recovery.

Market participants are overwhelmingly expecting the Fed to raise the tapering amount of its monthly bond-buy program from $15 billion to $30 billion. At this rate, the quantitative easing program will terminate in March 2022 instead of June targeted earlier.

The central bank has maintained the benchmark lending rate in the range of 0-0.25% since March 2020. With accelerated tapering, the first rate hike is now expected in second-quarter 2022 instead of the second half of 2022 anticipated earlier. Per CME FedWatch, investors are currently expecting three rate hikes of 25 basis points each in 2022.

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 yield of bonds 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 with strong growth potential for the rest of 2021 and saw positive earnings estimate revisions within the past 30 days. These companies are regular dividend payers. The dividends act as an income stream during a market downturn. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (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.

Image Source: Zacks Investment Research

Fidelity National Financial is one of the nation's largest title insurance companies through its title insurance underwriters. Fidelity National Financial also provides flood insurance, personal lines insurance and home warranty insurance through its specialty insurance business.

Fidelity National Financial is a leading provider of outsourced claims management services to large corporate and public sector entities through its minority-owned subsidiary, Sedgwick CMS.

Zacks Rank #1 FNF has an expected earnings growth rate of 36.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 6.1% over the past 30 days. FNF has a current dividend yield of 3.18%.

W. R. Berkley has been consistently 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.

Zacks Rank #2 W. R. Berkley has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past seven days. WRB has a current dividend yield of 0.64%.

Cincinnati Financial continues to grow 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 other positives.

Cincinnati Financial is focused on earning new business by appointing new agencies and believes that an agent-focused business model will drive long-term premium growth. Cincinnati Financial boasts 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.

Zacks Rank #2 Cincinnati Financial has an expected earnings growth rate of 69.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the past 30 days. CINF has a current dividend yield of 2.17%.

Aflac continues to maintain strong risk-adjusted capital at its operating subsidiaries supported by consistent earnings and good liquidity. AFL’s U.S segment is poised to grow from the buyout of Argus Dental and Vision and Zurich North America's U.S. Corporate Life and Pensions (Group Benefits) business. A robust product pipeline for 2021 is likely to boost the segment’s sales going forward.

The cost-saving initiative of Aflac will aid the bottom line. Sound capital management enables AFL to return its shareholders’ funds via share buybacks and dividend payments. Aflac has been raising the dividend for 39 straight years and looks to sustain the trend.

Zacks Rank #2 Aflac has an expected earnings growth rate of 18.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5% over the past 30 days. AFL has a current dividend yield of 2.28%.

Brown & Brown 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. Brown & Brown's sturdy performance has been driving cash flow, enabling it to deploy capital in shareholder-friendly moves. BRO boasts a strong balance sheet backed by a solid cash position.

Zacks Rank #2 Brown & Brown has an expected earnings growth rate of 29.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the past 30 days. BRO has a current dividend yield of 0.61%.

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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.