U.S. Treasury yields surged further on Wednesday, Sept. 23, as investors reassessed the outlook for inflation and Federal Reserve policy. The 10-year Treasury yield climbed as high as 5.12%, its highest level since 2007, while the 30-year yield touched 5.37%. The five-year yield also reached a 2007 high as stocks declined.
The latest rise in yields reflects a combination of stronger economic activity, elevated oil prices and growing expectations for additional Fed rate hikes. S&P Global's flash U.S. Composite PMI rose to 58.4 in September from 56 in August, marking the strongest expansion in more than five years. The report also showed accelerating cost pressures, reinforcing concerns that inflation could persist.
Higher oil prices are adding to those inflation worries. Energy costs have risen amid continuing geopolitical tensions, raising concerns that inflation could prove more difficult to contain. Meanwhile, Federal Reserve Governor Michael Barr signaled on Wednesday that additional interest rate increases may be needed to bring the persistent inflation under control. These developments have increased expectations for further monetary tightening and pushed Treasury yields higher.
Insurance Stocks Could Benefit From Higher Rates
The insurance sector could potentially benefit from a prolonged higher-rate environment, particularly life insurers and reinsurers with substantial investment portfolios. Higher interest rates can allow insurers to reinvest premiums and other available funds at higher yields, potentially supporting investment income and profitability. Higher rates can also improve returns on insurers’ fixed-income portfolios over time. The Hanover Insurance Group, Inc. THG, CNO Financial Group, Inc. CNO, Reinsurance Group of America, Incorporated RGA and Slide Insurance Holdings, Inc. SLDE are four stocks that must be closely watched in this environment.
However, the benefits are not guaranteed. Insurers may face higher claims costs, elevated catastrophe losses and weaker demand if economic conditions deteriorate. For life insurers, higher rates can also affect the valuation of liabilities and the competitiveness of certain insurance products.
For now, insurance stocks could remain an area of interest as Treasury yields climb, particularly companies with large investment portfolios and diversified insurance operations.
Our Choices
The stocks below flaunt a Zacks Rank #1 (Strong Buy) or Rank #2 (Buy). The search was also narrowed down with a VGM Score of A or B. Here, V stands for Value, G for Growth and M for Momentum. The score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Hanover Insurance Group is a property and casualty insurance company providing personal, commercial and specialty insurance products through independent agents. THG’s expected earnings growth rate for the current year is 5.7%. The Zacks Consensus Estimate for its current-year earnings has increased 9.7% over the past 60 days. This Zacks Rank #2 company has a VGM Score of A.
CNO Financial Group is a financial services company providing life insurance, annuities, retirement solutions and supplemental health insurance to middle-income Americans. CNO’s expected earnings growth rate for the current year is 16.2%. The Zacks Consensus Estimate for its current-year earnings has improved 6.8% over the past 60 days. This Zacks Rank #2 company has a VGM Score of B.
Reinsurance Group of America is a global life and health reinsurer providing mortality, longevity, morbidity and financial solutions to insurance companies. RGA’s expected earnings growth rate for the current year is 30.6%. The Zacks Consensus Estimate for its current-year earnings has increased 10.6% over the past 60 days. This Zacks Rank #2 company has a VGM Score of B.
Slide Insurance Holdings is a property and casualty insurance company providing homeowners insurance and related products, primarily through digital platforms and independent agents. SLDE’s expected earnings growth rate for the current year is 12.8%. The Zacks Consensus Estimate for its current-year earnings has increased 5.6% over the past 60 days. This Zacks Rank #1 company has a VGM Score of A.
Bottom Line
Higher Treasury yields could support insurers by increasing investment income and improving returns on reinvested premiums. However, elevated claims, catastrophe losses and economic weakness could offset these benefits. Investors may therefore monitor insurers with diversified businesses and substantial investment portfolios.
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CNO Financial Group, Inc. (CNO): Free Stock Analysis Report
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Slide Insurance Holdings, Inc. (SLDE): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).