4 Insurance Stocks To Buy Before A Rate Hike

Will the Federal Open Market Committee (FOMC) make any positive change to the interest rate in the meeting scheduled on Jun 15? While this is anybody’s guess, the Fed decision is being eagerly waited for.

When everyone predicted an increase in the rate in the Sep 2015 FOMC meeting, the Fed decided against it. However, after a period of prolonged near zero interest rate, the Fed chose to raise the rates to only 0.25–0.50% at its December meeting. While the federal funds rate was kept the same at the Mar 2016 meeting, uncertainties over further rate hikes were removed. In fact, the Fed lowered the median forecast for the number of rate hikes this year to two from four projected at its meeting last December.

Nevertheless, the rate environment is still low. But comments from St. Louis Fed President James Bullard is definitely drawing attention. In an interview to CNBC, Bullard said, “A U.S. Federal Reserve rate hike in June or July wasn't set in stone, but labor data suggested it was time to pull the trigger.” As per the Bureau of Labor Statistics, total nonfarm payroll employment in April increased by nearly 0.2 million while the unemployment rate remained unchanged at 5%. Other factors that might act as gunpowder are the easing of the U.S. dollar, momentum in oil prices and inflation approaching 2% as noted by Eric Rosengren, the president of the Federal Reserve Bank of Boston.

It is to be noted that the June meeting will be before the U.S. presidential election and will thus attract eyeballs. However, James Bullard does not think that the election will have any impact on the Fed’s decision of hiking rates.

Interest rate directly impacts the investment results of a company. For insurance companies, investment income forms a major revenue component. A low rate puts pressure on investment income and in turn on investment yields. Life insurers, in particular, suffer spread compression on products like fixed annuities and universal life due to sustained low rates. Hence any increase in the interest rate would bring some respite for insurers.

But it’s not that a low interest rate regime does not bring any fortunes for insurance companies. These generally hold a considerable amount in bonds, which would see a decline in value if rates rise.

So since insurance stocks are poised for growth no matter what the Fed chooses to do, the space is bound to attract attention. We have picked four solid operators in the space that have the potential to boost one’s portfolio even more. We refined our search using the Zacks Investment Research

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Written By: Zacks Investment Research