Insurers To Bet On Even As Coronavirus Induces Interest Cut

The Federal Reserve on Tuesday announced that it cut its benchmark interest rate by half a percentage point to 1-1.25%. This move comes as the yield on the 10-year U.S. Treasury note stoops to historic lows amid the coronavirus-induced market correction that saw investors flock to safe-haven assets.

However, this rate reduction could not provide much cushion to inspire investors’ optimism as uncertainty persisted. All major U.S. indices, namely the Dow Jones Industrials, the S&P 500 and the Nasdaq shed close to 3% of value.

Several industries suffered a decline in business and many companies are seriously revising their sales and earnings guidance. Fears of global recession loom large while the Fed takes a supportive action by slashing its interest rate.

The Organization for Economic Cooperation and Development tweaked its growth outlook for the global economy stating that it is expected to inch up 2.4%, indicating marginal weakness from the 2.9% expansion projected before the viral outbreak.

Also manufacturing and business activities in the U.S has taken a hit. Per IHS Markit data, these activities in the United States seemingly ramped down in February for the first time since the federal government’s shutdown in 2013.

However, amid such bleak scenario, how far the rate cut can be of any help is still under a cloud of doubt.

Impact on Insurance Industry

Financial institutions such as banks and the insurance industry are at a loss due to this coronavirus-led rate cut in Fed funds. Decline in interest rates reduces the spread (between borrowing and lending) that banks earn while insurers take a hit from low investment yields, which eat into their investment income, one of its revenue driver.

However, the effect of low interest rates is much pronounced on life insurance players, given their rate-sensitive products and investments. Life insurers' earnings are typically derived from the spread between their investment returns and what they credit as interest on insurance policies and products. In times of persistently low interest rates, life insurers' income from investments might be insufficient to meet the contractually-guaranteed obligations to policyholders, which cannot be lowered.

Thus investors should be extra cautious while investing in the insurance space under the current environment. A safer choice would be to pick property and casualty insurers. These companies have been enjoying a solid top line with vast and diversified businesses. Premium rates in Personal and Commercial lines of insurance have been rising from the last several quarters and this trend is expected to continue. Also, a benign catastrophe loss in 2019 led to strong capital levels. This will allow insurers to buy back shares, hike dividend plus go for mergers and acquisitions, fueling overall growth.

Our Picks

Below we zero in on some stocks, which should provide attractive investment opportunities based on their top Zacks Rank and a favorable a VGM Score.

Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three factors. Such a score allows you to eliminate the negative aspects of stocks and only 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.

First American Financial Corp. (NYSE:FAF) has a Zacks Rank #1 (Strong Buy) and a VGM score of B. The stock has witnessed 2020 earnings estimates being revised 1.96% upward to $5.19 per share in the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cincinnati Fianancial Corp. (NASDAQ:CINF) has a Zacks Rank #2 (Buy) and a VGM score of B. The stock has witnessed current-year earnings estimates move 1.31% north to $3.87 per share in the past 30 days.

Markel Corporation (NYSE:MKL) has a Zacks Rank of 2 and a VGM score of B. The stock has witnessed 2020 earnings estimates being raised 3.45% to $40.74 per share in the past 30 days.

Fidelty National Financial, Inc. (NYSE:FNF) is Zacks #2 Ranked and has a VGM score of A. The stock has witnessed 2020 earnings estimates being lifted 3.33% to $3.41 per share in the past 30 days.

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