What are we looking for?
U.S. insurance companies poised to benefit from the Fed rate hike.
Last Wednesday, the U.S. Federal Reserve decided to raise short-term interest rates for the first time since 2009.
While it is true to say that higher interest rates generally mean higher borrowing costs, there are still some sectors that should benefit from this. The insurance industry is one of them.
Insurance companies almost exclusively hold safe debt to back their policies, and these investments have been providing weak returns since the financial crisis. They will yield much better returns in a higher-rate environment. Higher interest rates also mean the economy is strengthening and consumer spending is increasing – more car and home sales, which is definitely good news for insurance companies.
We have screened the U.S. insurance companies with four criteria, covering economic performance and also accounting performance. They are:
- an economic performance index, or EPI (return on capital divided by cost of capital) above 1.0. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- return on capital above 10 per cent;
- dividend yield above 1.5 per cent;
- an annualized dividend growth rate of 5 per cent or more over the last one, two, three and four years.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and U.S. depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Ten U.S. insurance companies are identified by our screener. AmTrust Financial Services is by far the best economic performer with an EPI of 3.1, and also one of the top dividend growers of this group. Maiden Holdings Ltd. has the smallest market cap of this group, but offers the best dividend yield with a very aggressive dividend growth too.
For someone who wants to stick with large caps (such as Marsh & McLennan, Chubb Corp. and Travelers Cos. Inc.), Chubb not only offers the best dividend growth rate, but you can see this growth rate has been accelerating every year over the last four years.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.