As the U.S. economy continues to improve, many market-watchers expect the Federal Reserve to begin raising interest rates some time later this year. Although an environment of increasing rates is generally bad for the stock market, some industries such as insurance actually thrive in such an environment. Because insurance companies must hold large amounts of debt to underwrite the policies they write, raising rates mean increasing margins and profits.
The screen. We will be using Recognia Strategy Builder to search for large U.S. insurers poised to benefit from a rising-rate environment. We begin by setting a minimum market-cap threshold of $10 billion. We will focus on the largest and most stable companies in the market, as they offer the greatest security and will be best able to ride out any unfavorable developments in market conditions.
Next, we will look for companies with strong margins and earnings growth as proof of their efficient operations and ability to generate earnings for shareholders. We will screen for companies with an earnings per share-growth rate (last quarter versus prior quarter) of 10 percent or more and an operating margin also of 10 percent or more. Operating margin is a measure of business efficiency which indicates how much profit an enterprise makes on each dollar of incremental revenue.
Finally, in order to pick companies with reasonable valuation levels, we will specify a trailing P/E ratio of 16 or less. This will allow us to focus on companies with reasonably priced stocks compared to their past earnings.
What did we find? Let’s check out five insurance companies that may be poised for growth.
The Travelers Companies Inc. The company, headquartered in New York, has been a Dow Jones industrial average component since 2009. This company has a market cap of $34 billion and is the second largest commercial property insurer in the U.S. The company’s stock has had a great run over the past year, and is up over 33 percent in the past 12 months. The company has a very attractive dividend yield at 2.9 percent and has the highest operating margin of any company on our list, at 34.1 percent.
MetLife. It is among the largest worldwide providers of insurance, annuities and employee-benefit programs. Headquartered in New York, Metlife is the second largest company on our list with a market cap exceeding $55 billion. The company carries a 2.1 percent-dividend yield and is currently growing its earnings very effectively with a 129 percent quarterly earnings-growth rate. Metlife’s stock had a lackluster performance in 2014, and ended the year basically flat. As a result, its P/E ratio is now quite attractive compared to many of its peers, at just 9.7. On Feb. 11, Metlife reported fourth-quarter results that beat analyst expectations on both revenue and earnings.
Allstate Corporation. This Illinois-based company is the largest publicly held personal insurer in the U.S. With a quarterly EPS growth rate of 152 percent, the company justifies its somewhat higher P/E ratio of 11.1. In early February, the company announced fourth-quarter results which beat analyst expectations. This good news continued the stock’s one-year performance trend, currently up 34.4 percent year-over-year.
American International Group Inc. (AIG). It does business in over 130 countries and has more than 88 million customers. It is the largest firm on our list, with a market cap of $72 billion, and it carries a 1.6 percent-dividend yield. AIG also is the most reasonably priced, with a trailing P/E ratio of just 8.2. The stock made a new 52-week high on Dec. 31, but has since fallen by approximately 10 percent following a downgrade by Credit Suisse. On Feb. 12, the company announced fourth-quarter results that fell short of analyst expectations.
Aetna Inc. This company, based in Connecticut, is among the largest U.S. managed-health companies and is a member of the Fortune 100 and Standard & Poor’s 500 index. It is tied for the highest dividend yield on our list, with an annual-dividend payout of 2.9 percent. In February, Aetna reported fiscal year 2014 results, which showed revenue was up 22 percent year-over-year. The stock has already rallied 41 percent in the past year and may be due for additional gain in 2015.
Recognia Strategy Builder provides a backtesting capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 15.2 percent annualized return, compared to 13.3 percent for the S&P 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is the vice president of retail and self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company’s client service delivery, including the distribution of in-depth investment research culled from Recognia’s patented investing analytics.
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