4 Insurance Stocks That Just Moved Into 'Buy' Territory

As expected, the Federal Reserve has made no changes to the interest rate in the FOMC meeting that concluded yesterday. The rate remains unchanged since Dec 2015 when the Fed imposed a meager 0.25–0.50% hike after a decade. The market was contemplating a hike after favorable trends were noticed in April.

However, all hopes of a June hike were washed away following a weak jobs data in May. To everybody’s disappointment, only about 0.04 million jobs were added in May against more than 0.2 million expected. Though the unemployment scenario improved, job additions decreased.

Nonetheless, everybody is pinning hopes on the FOMC meeting scheduled next month. According to Jan Hatzius of Goldman Sachs, “there is a decent chance it will raise rates in July.”Goldman Sachs estimates a 35% chance of a rate increase in July with 35% chance that the same may materialize in September.

However, there were indications in the recently concluded FOMC meeting that there is a possibility of only one hike this year.Earlier, the Fed at its March meeting, reduced the median forecast for the number of rate hikes this year to two from four projected at its meeting last December. The fed funds futures market sees a 54% chance of only one increase this year.

In fact, expectations were lowered for the magnitude of increase in rates even. Fed officials now expect the fund rate to be 0.9% for 2016, 1.6% in 2017 (lowered from 1.9% expected at March meeting) and 2.4% for 2018 (reduced from 3% projected earlier).

Outcome of the FOMC meeting, especially the stance on interest rates always grabs attention from the participants of the Insurance industries. This is because interest rates have a direct impact on investment results and investment income forms a major component of insurer’s revenues. A low interest rate translates into low investment income and investment yield. Also, life insurers, in particular, suffer spread compression on products like fixed annuities and universal life.

However, a low interest rate environment is not all bad news for the insurance industry. This is because insurers hold a considerable amount in bonds, which would see a decline in value if the rates rise. Insurers have somehow managed to guard themselves against the low rates. A broader invested asset base and alternative asset classes have provided some cushion amid low rates, though the results are way below their historic highs.

Also, the insurers are enjoying a not-so-active catastrophe environment. This in turn is favoring underwriting results besides helping them to build their reserves. Also, insurers are redesigning and re-pricing products that are driving premiums higher apart from managing underwriting costs prudently to boost profitability.

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