The first rate hike for 2018 comes as expected. With the latest raise of 25 basis points at the recently concluded FOMC meeting, the interest rate now stands at 1.50-1.75%. The decision was unanimously favored by all eight members of the regulatory body.
Jerome Powell for the first time addressed the meeting as Fed chairman after Janet Yellen stepped down and the current chairperson was sworn in late February.
Carrying on the legacy of Ms Yellen, the new chairperson announced intentions of three rate hikes in the current year, banking on an optimistic economic backdrop. However, there were differences of opinion on whether there should be three or four hikes this year.
In fact expectations for a number of rate hikes in 2019 were also increased. Federal Reserve Bank has projected a median federal funds rate of 2.9% by 2019-end, implying three rate hikes in the year, up from the two indicated earlier. With prediction of a couple of hikes more in 2020, interest rate is expected to reach 3.4% at 2020-end, up from the previously estimated 3.1%.
Major indexes namely S&P 500, Nasdaq and Dow Jones Industrial Average have lost in yesterday’s trading session.
Encouraging Economic Data Instill Hope
The Fed has hiked rates six times since the financial crises. The first hike was made in December 2015 followed by another in December 2016 and three in 2017. The heightened pace clearly signals toward strengthening of U.S. economy.
The Fed also provided an optimistic unemployment outlook. Its officials expect the employment rate at 3.8% for 2018, 3.6% for both 2019 and 2020 and 4.5% over the long term, comparing with 3.9% for 2018 and 2019, 4% for 2020 and 4.6% over the longer–term, predicted in its December 2017 FOMC meeting. A spurt in employment shows an average of 0.2 million jobs increased over the last three months.
Encouraging economic data instill hopes. The Fed now estimates GDP to grow at 2.7% in 2018 and 2.4% in 2019, reflecting an increase from 2.5% for 2018 and 2.1% for 2019, forecast in the past. GDP for 2020 is now projected to be 2% and 1.8% for the long run. Powell also stated that “Overall, consumer prices, as measured by the price index for personal consumption expenditures increased 1.7 % in the 12 months”.
However, inflation is expected to remain below the targeted 2% through the year, though will meet the target next year and exceed the same thereafter. While inflation is estimated at 1.9% in 2018, the same will move up to 2% in 2019 and 2.1% in 2020.
An improving rate environment comes as good news for some while bad for some others. Capital intensive industries worry as cost of capital rises. Meanwhile, banks and insurers remain major beneficiaries of an improving rate environment because of their sensitivity to interest rates.
Tax Cuts and Jobs Act
With the progressing rate environment, investment income — an important component of insurers’ top line — is also exhibiting an upswing. Life insurers having suffered a spread compression on products like fixed annuities and universal life due to persistently low rates have started to benefit. In addition, investment yield is likely to have risen. Annuity sales too should gain from higher rates.
Advantages of a better rate could already be seen in the insurers’ results. Advancing economy, encouraging employment data, stringent underwriting standards as well as capital influx infuse confidence in the stock among investors.
Additionally, President Donald Trump has signed the Tax Cuts and Jobs Act into law on Dec 22, 2017. The tax reform policy, an overhaul of the tax code after 31 years, lowers the corporate tax burden to 21% from 35% and calls for a $1.5-trillion tax cut. This move will act as an impetus.
Amid an improving macro backdrop, investors always look eagerly to add stocks with strong fundamentals, which are likely to generate better yields.
It’s every investor’s wish to invest in currently undervalued stocks with great growth potential. Value investors always yearn to put their money on stocks that tend to trade at a lower price or at a value, lower than the intrinsic one. Whereas, growth investors look for stocks with an earnings increase, relatively better than the market. Therefore they ideally search for value stocks to reap better returns.
Choosing the Right Insurance Stocks
It’s a daunting task to zero in on underpriced stocks with a high-growth offer. The Zacks Stock Screener makes this work relatively simpler. Back-tested results have shown that stocks with Value Scores and Growth Score of A or B combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
We have shortlisted four insurance stocks with an expected long-term earnings growth rate of 6% or more. These stocks have a Zacks Rank #1 or #2 and a favorable Value Score and Growth Score of A or B.
Best Insurance Stocks to Buy After Fed Rate Hike: Primerica, Inc. (PRI)
Headquartered in Duluth, GA Primerica, Inc. (NYSE:PRI) distributes financial products to middle income households in the United States and Canada. The expected long-term earnings growth rate stands at 10%. The stock carries a Value Score and Growth Score of B and sports Zacks Rank #1.
Shares have gained 0.05% versus the industry’s decline of 4.7% year to date.
Best Insurance Stocks to Buy After Fed Rate Hike: American Financial Group Inc (AFG)
Cincinnati, OH-based American Financial Group Inc (NYSE:AFG) provides property and casualty insurance products in the United States. The expected long-term earnings growth rate is pegged at at 12%. The stock has a favorable Value Score and Growth Score of B and carries Zacks Rank #2.
Shares have risen 6.6% compared with the industry’s growth of 3.6% year to date.
Best Insurance Stocks to Buy After Fed Rate Hike: First American Financial Corp (FAF)
Santa Ana, CA-based First American Financial Corp (NYSE:FAF) provides financial services. The expected long-term earnings growth rate is 13%. The stock carries a Value Score and Growth Score of B and carries Zacks Rank of 2.
Shares of the company have climbed 8.1% compared with the industry’s rise of 3.6% year to date.
Best Insurance Stocks to Buy After Fed Rate Hike: Radian Group Inc (RDN)
Philadelphia, PA-based Radian Group Inc (NYSE:RDN) provides mortgage and real estate products and services in the United States. The expected long-term earnings growth rate stands at 13%. The stock carries an impressive Value Score of A, Growth Score of B and carries Zacks Rank #2.
Shares have outperformed the industry year to date. The stock has lost 4.3%, narrower than the industry’s decrease of 8.6%.
Zacks Editor-in-Chief Goes “All In” on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.