Despite signs of the Fed achieving a soft landing, additional rate hikes could be in the offing. Insurance companies usually benefit from rising interest rates. Amid this backdrop, it could be prudent to buy fundamentally strong insurance stocks Loews (L), MS&AD Insurance Group (MSADY), and The Hartford Financial Services Group (HIG) this month. Read more….
Insurance companies are known to do well in a rising interest rate environment. Although the Fed is widely expected to keep interest rates steady at the next policy meeting in December, central bank officials have indicated more rate hikes could be in the offing.
To that end, it could be wise to buy fundamentally strong insurance stocks Loews Corporation (L), MS&AD Insurance Group Holdings, Inc. (MSADY), and The Hartford Financial Services Group, Inc. (HIG) in November for substantial returns.
Before discussing these stocks in detail, let’s discuss why the insurance industry is worth looking at.
The need for insurance is imperative in today’s world of uncertainties. The insurance industry appeals to conservative investors since these businesses are known to prosper regardless of the state of the economy. Various types of insurance are required by law to help protect people against unforeseen losses.
Insurance companies generate revenue by charging premiums from policyholders for the policies they sell. They invest these premiums in various financial instruments such as bonds, stocks, and real estate. Although rising interest rates affect most sectors, the financial sector, which includes insurers, benefits.
Insurers hold long-term safe bonds to meet their promised returns to policyholders. In a rising interest rate environment, their investments yield higher returns. Moreover, insurance companies may be able to charge higher premiums due to the increased cost of capital. This can lead to improved underwriting margins.
The Fed left interest rates unchanged for the second time in a row following 11 consecutive rate hikes since March 2022, including four this year. The Fed has held the benchmark interest rates steady between 5.25% and 5.5% since July. In September, the consumer price index (CPI) grew 0.4% sequentially and 3.7% year-over-year, coming in higher than economists’ estimates of 0.3% and 3.6%, respectively.
However, the expectations of the U.S. economy experiencing a soft landing rose after the recently released jobs data that showed nonfarm payrolls rose less than analyst estimates. Nonfarm payrolls rose 150,000 in October, coming in below the consensus forecast of 170,000. The rise in nonfarm payrolls was lower than September’s 297,000 gain. The unemployment rate rose to 3.9%, the highest since January 2022.
Despite signs of the Fed managing to slow the economy, central bank officials insist that the incoming macroeconomic data should shape their policy decisions. Many central bankers have said that additional rate increases could be in the offing. Minneapolis Fed President Neel Kashkari believes that the central bank likely has more work ahead to control inflation. This could be beneficial for insurers.
The global property and casualty insurance market is expected to rise at a CAGR of 6.7% from 2023 to 2033. Investors’ interest in the property and casualty insurance industry is evident from the Invesco Property & Casualty Insurance ETF’s (KBWP) 5.6% returns over the past three months.
Considering this favorable backdrop, let’s evaluate the three Insurance – Property & Casualty stock picks, beginning with the third choice.
Stock #3: Loews Corporation (L)
L provides commercial property and casualty insurance in the United States and internationally. The company offers specialty insurance products like management and professional liability, other coverage products, surety and fidelity bonds, property insurance, and casualty insurance.
In terms of the trailing-12-month Return on Total Assets (ROTA), L’s 2% is 74.6% higher than the 1.15% industry average. Likewise, its 4.44% trailing-12-month Capex/Sales is 123.1% higher than the industry average of 1.99%.
For the fiscal third quarter that ended September 30, 2023, L’s total revenues increased 13.4% year-over-year to $3.93 billion. Its adjusted EBITDA stood at $60 million. Also, net income attributable to L came in at $253 million, compared to a net loss of $22 million in the prior year’s quarter.
In addition, L’s net income per share attributable to L came in at $1.12, compared to a loss per share of $0.09 a year ago.
Over the past year, the stock has gained 16.4% to close the last trading session at $65.89.
L’s POWR Ratings reflect this promising outlook. It has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and a B for Growth, Stability, and Sentiment. It is ranked #4 out of 56 stocks in the Insurance – Property & Casualty industry. To see the other ratings of L for Value and Quality, click here.
Stock #2: MS&AD Insurance Group Holdings, Inc. (MSADY)
Headquartered in Tokyo, Japan, MSADY is an insurance holding company that provides insurance and financial services worldwide. The company offers fire and allied, marine, personal accident, voluntary automobile, compulsory automobile liability, non-insurance products, life insurance products, and reinsurance services. It also provides risk-related services.
In terms of the trailing-12-month Return on Total Capital (ROTC), MSADY’s 7.15% is 11% higher than the 6.44% industry average. Likewise, its 0.23x trailing-12-month asset turnover ratio is 11.1% higher than the industry average of 0.21x.
MSADY’s ordinary income for the first quarter ended June 30, 2023, increased 50.5% year-over-year to ¥1.98 trillion ($13.06 billion). Its ordinary profit rose 34.5% year-over-year to ¥155.45 billion ($1.03 billion). The company’s net income attributable to owners of parent increased 42.8% over the prior-year quarter to ¥111.62 billion ($736.41 million).
Furthermore, the company’s net income attributable to owners of the parent per share came in at ¥209.01, representing an increase of 46.3% year-over-year.
For the fiscal year 2024, MSADY’s revenue is expected to increase 173.8% year-over-year to $38.82 billion. Over the past year, the stock has gained 28.2% to close the last trading session at $18.48.
MSADY’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, equating to a Buy in our proprietary rating system.
It has an A grade for Growth and Momentum and a B for Value and Stability. Within the same industry, MSADY is ranked #3.
Click here to see the other ratings of MSADY for Sentiment and Quality.
Stock #1: The Hartford Financial Services Group, Inc. (HIG)
HIG provides insurance and financial services to individual and business customers internationally. The company’s segments include Commercial Lines; Personal Lines; Property & Casualty Other Operations; Group Benefits; and Hartford Funds.
In terms of the trailing-12-month Return on Total Assets (ROTA), HIG’s 3.11% is 171.3% higher than the 1.15% industry average. Likewise, its 0.33x trailing-12-month asset turnover ratio is 56.6% higher than the industry average of 0.21x. Further, the stock’s 17.72% trailing-12-month Return on Common Equity (ROCE) is 52.8% higher than the industry average of 11.59%.
For the third quarter ended September 30, 2023, HIG’s net income available to common stockholders increased 93% year-over-year to $645 million. Its core earnings rose 50% over the prior-year quarter to $708 million. The company’s net income available to common stockholders per share increased 105% year-over-year to $2.09. Also, its total revenues came in at $6.17 billion, up 10.5% year-over-year.
Analysts expect HIG’s EPS and revenue for the fourth quarter (ending December 31, 2023) to increase 0.6% and 5.7% year-over-year to $2.32 and $6.36 billion, respectively. Moreover, the company surpassed the consensus EPS estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 5.9% to close the last trading session at $73.97.
HIG’s promising prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked first in the Insurance – Property & Casualty industry. It has an A grade for Momentum and a B for Stability and Sentiment.
To see the additional ratings of HIG for Growth, Value, and Quality, click here.
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HIG shares were unchanged in premarket trading Monday. Year-to-date, HIG has declined -0.72%, versus a 16.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.