Markets snapped a chain of five consecutive weekly gains last Thursday to close in the red for the Good Friday holiday. More significantly, the S&P 500 gave up its gains for the year on Wednesday, lending a somber note to the proceedings. Some of these losses are attributable to Tuesday’s horrific terror attacks in Brussels but markets continued to suffer from familiar vagaries such as the volatility in oil prices.
Additionally, the Fed recently asserted that the number of rate hikes this year will be fewer than earlier anticipated. However, recent statements from Fed officials have led to questions about the path of interest rates. These factors have combined to create renewed uncertainty over market direction. Property and casualty insurance stocks are good choices in such an environment, which is why it would be a smart move to add them to your portfolio.
Rate Hike Path Unclear
The Federal Open Market Committee (FOMC) shied away from raising rates at its recently concluded policy meeting. The FOMC cited fears about a weakening global economy and the pace of price increases for such a move. However, it did acknowledge that risks to the outlook have diminished.
Meanwhile, several Fed officials made contradictory comments on the issue this week. Atlanta Fed President Dennis Lockhart said that the recent data was evidence of another recent hike, even during the meeting in April. Also, Philadelphia Fed President Patrick Harker said that the Fed might raise interest rates following recent improvements in the U.S. economy.
However, economic data remains mixed in nature. While recent readings on GDP and the labor market have been mostly upbeat, other indicators remain disappointing. This is particularly true for manufacturing as borne out by reports on industrial production, durable orders and the ISM Manufacturing Index, which remains below 50.
Property and Casualty Insurance’s Strengths
Insurance is usually considered a sector which is extremely sensitive to interest rate and changes and gains from a rise in rates. However, there are exceptions which prove that the internal workings of this sector are not as simplistic as they seem at first glance.
Property and casualty insurance is one such segment of the sector which is comparatively less sensitive to interest rates. In fact, such companies have a higher debt component since they hold an appreciably large amount of bonds. If a rate hike occurs, the value of these bonds would fall which means that they benefit somewhat from a low interest rate regime.
On the other hand, if rates indeed rise, the segment’s investment income and consequently its earnings would increase. Additionally, higher rates breed more competition, providing more scope for such companies to grow. Further, a moderate degree of catastrophe losses and steady capital influx will add to the attractiveness of such stocks.
Our Choices
The uncertainty over the path of interest rates and the market in general means that investors need to seek out stocks which offer some degree of insulation and the potential of significant price gains as the same time. Property and casualty insurance is one such sector which may remain relatively unaffected if rates remain low and gain when rates increase. The challenge then comes down to seeking out stocks which have the ability to deliver appreciably high price gains.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.
W.R. Berkley Corporation WRB is one of the nation’s premier commercial lines property casualty insurance providers.
W.R. Berkley has a Zacks Rank #2 (Buy) and a VGM Score of B. Its earnings estimate for the current year has improved by 0.7% over the last 30 days.
Selective Insurance Group Inc. SIGI through its insurance subsidiaries offers a broad range of property and casualty insurance products.
Selective Insurance has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 3.7% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 12.47, lower than the industry average of 12.50.
NMI Holdings, Inc. NMIH via its subsidiaries offers private mortgage insurance in the U.S.
NMI Holdings has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 93.6% for the current year.
Fidelity National Financial Ventures FNFV is a holding company which, among its other offerings, provides title insurance services to the real estate and mortgage sector.
Fidelity National has a Zacks Rank #2 and a VGM Score of B. It has a P/S ratio of 0.46, which is lower than the industry average of 1.10. Additionally, it has a P/B of 0.13, lower than the industry average of 1.20.
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