Top 5 Insurance Stocks to Play a Higher Interest Rate Plan – September 16, 2022

US equity markets faced extreme volatility in 2022, with the exception of a short summer rally from mid-June to mid-August. The inflation rate has refused to come down from a 40-year high, even as the Fed raised the benchmark interest rate from 0-0.25% in early March to 2.25-2.5% in July .

The central bank raised the benchmark interest rate by 75 basis points at back-to-back FOMC meetings in June and July. This happened for the first time since 1994. Market participants have already priced in another 75 basis point rate hike at the upcoming FOMC meeting in September. A section of economists and financial researchers even expects a 1% increase in the short-term lending rate this month.

As a result, the chances of a recession in the US economy in the near future are significant. Several major retailers, carriers and social media companies have warned of a global slowdown in late 2022 or early 2023. Last month, Fed Chairman Jerome Powell told the Jackson Hole symposium that the economy could face short-term difficulties in terms of tackling rising inflationary pressure.

The continuation of the Fed’s hawkish monetary positions should benefit the entire financial sector. We’ve selected five insurance stocks with favorable Zacks rankings that are likely to benefit from a higher interest rate in the market. These are – WR Berkley Corp. (WRB free report), Unum Group (MNU free report), Arch Capital Group Ltd. (ACGL free report), Everest Re Group Ltd. (RE free report) and Berkshire Hathaway Inc. (BRK.B free report).

The insurance industry up for grabs

A large part of the financial sector is the insurance industry. It is made up of life insurers, P&C insurers, accident and health insurers, multi-line insurers and insurance brokerage firms.

A massive rise in the market interest rate will increase the cost of funds, allowing financial firms to widen the spread between longer-term assets, such as loans, and shorter-term liabilities, thereby increasing the financial sector profit margin.

Insurers are usually required to hold many long-term, safe bonds to secure the policies purchased. A higher interest rate will benefit insurance companies. The gap between longer-term assets and short-term liabilities will increase the spread for insurers. Moreover, the profitability of the insurance industry has historically increased during the period of rising interest rates.

Our top picks

We limited our research to five insurers that saw positive earnings estimate revisions in the last 60 days. These insurers have strong growth potential for the remainder of 2022. Each of our picks carries either a Zacks rank #1 (Strong Buy) or 2 (Buy). You can see the full list of today’s Zacks #1 Rank stocks here.

The graph below shows the price performance of our five picks over the past three months.

Image source: Zacks Investment Research

WR Berkeley has benefited from its insurance business, recording good results thanks to the increase in premiums written in recent years. WR Berkley has been investing in numerous startups since 2006 and has established new units in growing international markets.

WR Berkley’s international business is poised for growth driven by emerging markets. WRB’s strong capital position enables capital deployment. Investing in alternative assets should help improve investment income in the future.

Zacks Rank #1 WR Berkley has an expected profit growth rate of 20.6% for the current year. The Zacks consensus estimate for current-year earnings has improved 8.8% over the past 60 days.

Unum GroupPrudent pricing and booking practices contributed to overall profitability. Sustained premium growth is fueled by high levels of persistence across key lines of business and strong sales volume and strong benefits experience.

Continued dental product rollout and geographic expansion has paid off for UNM as its acquired dental insurance business grows in the US and UK UNM has consistently improved shareholder value. Unum Group expects 2022 premiums to increase by around 2%. Adjusted operating EPS is expected to grow 15-20%.

Zacks Rank #1 Unum Group has an expected profit growth rate of 40.5% for the current year. The Zacks consensus estimate for current-year earnings has improved 1.3% over the past 7 days.

Berkshire Hathaway is one of the largest P&C insurance companies by premium volume. BRK.B’s inorganic growth story remains impressive with strategic acquisitions. A strong cash position supports earnings accretive add-on buybacks and indicates Berkshire Hathaway’s financial flexibility.

The continued growth of the insurance business is fueling an increase in free float, driving earnings and generating maximum return on equity. BRK.B’s non-insurance business is showing better results with increased revenue in recent years. A strong level of capital provides further momentum.

Zacks Rank #1 Berkshire Hathaway has an expected profit growth rate of 14.4% for the current year. The Zacks consensus estimate for current-year earnings has improved 7.6% over the past 60 days.

Ark Capital has a strong product portfolio and has maintained an exemplary history of premium growth. Premiums are expected to benefit ACGL from new business opportunities, rate increases, growth in existing accounts and growth in Australian single premium mortgage insurance.

That aside, Arch Capital has diversified its mortgage insurance business through strategic acquisitions that complement the strength of the specialty insurance and reinsurance businesses. A strong capital position protects ACGL from market volatility. It effectively deploys capital to pursue growth initiatives. Strategic buyouts strengthen Arch Capital’s portfolio and provide geographic diversification.

Zacks Rank #1 ACGL has an expected profit growth rate of 29.6% for the current year. The Zacks consensus estimate for current-year earnings has improved 9.4% over the past 60 days.

Everest ReThe global presence, product diversification and capital adequacy of bode well. The higher premiums earned by the insurance segment will likely improve the expense and claims ratio. RE’s Reinsurance segment remains well positioned to take advantage of opportunities arising from the continued disruption and evolution of the reinsurance market.

A strong capital position, with sufficient cash generation capabilities, supports efficient capital deployment. Everest RE is reducing exposure to areas that do not meet the right risk-return profile, building a portfolio with a mix of product lines, better rate matching and higher long-term margins, and repositioning its portfolio by improving credit quality of fixed income securities.

Zacks Rank #2 Everest RE has an expected earnings growth rate of 14.8% for the current year. The Zacks consensus estimate for current-year earnings has improved 1.9% over the past 60 days.

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