The Fed’s hawkish tilt, with interest rate hikes on the horizon, bodes well for insurance companies, as higher interest rates will help them generate better revenue. Higher bond yields increase risk-free returns, which benefits insurance companies, which invest in them to achieve the returns promised to policyholders.
Yields on U.S. Treasury bonds have been up year-to-date, but the benchmark 10-year yield jumped 12 basis points to about 2.05% on February 10, 2022. It broke above the 2% level for the first time since August 2019.
Yields on U.S. Treasury bonds rose after the Labor Department released consumer price index data for January, with inflation up 7.5% year-on-year, beating the U.S. estimate. Dow Jones by 7.2% and marking the highest inflation rate since February 1982. Searing inflation numbers coupled with a hawkish Federal Reserve fueled the idea that US interest rates would be raised more aggressively than expected.
Against this backdrop, we think it might make sense to add fundamentally strong insurance stocks MetLife, Inc. (ENCOUNTER) and Aegon NV (AEG) to their portfolio this month, as rising bond yields are likely to benefit them.
MetLife, Inc. (ENCOUNTER)
MET, based in New York, is a financial services company that provides insurance, annuity, employee benefits and asset management services worldwide. The company offers life, dental, group short and long term disability, individual disability, accidental death and dismemberment, vision, accident and sickness insurance. It also offers pension risk transfers, structured settlements, institutional annuities, and more.
On January 28, 2022, MET announced that its subsidiary, Metropolitan Tower Life Insurance Company, had entered into two longevity reinsurance transactions with Phoenix Group. Senior Vice President and Head of Risk Solutions for MET’s Retirement & Income Solutions business, Jay Wang, said: “Despite continued uncertainty around the pandemic, the UK pensions and risk transfer markets of longevity remain resilient, and we’re excited to continue to grow our presence in this space.”
MET’s total revenue increased 3.4% year-over-year to $20.08 billion for the fourth quarter ended Dec. 31, 2021. The company’s net income was $1 $.17 billion, down from $124 million a year ago. Also, its adjusted PES rose 6.8% year over year to $2.17.
Analysts expect MET’s fiscal 2023 EPS to rise 11.1% year-over-year to $8.03. Its revenue for the quarter ending June 30, 2022 is expected to increase 4.3% year-over-year to $16.56 billion. Additionally, it has exceeded street EPS estimates in each of the past four quarters. Over the past year, the stock price has gained 28.2% to close the last trading session at $70.50.
MET’s strong fundamentals are reflected in its POWR Rankings. It has an overall rating of B, which equates to a buy in our proprietary rating system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.
It has a B rating for Growth, Value, Momentum and Sentiment. It is ranked No. 5 out of 29 stocks in the B rating Life insurance industry. Click here to see MET’s ratings for stability and quality.
Aegon S.A. (AEG)
Based in The Hague, the Netherlands, AEG offers a range of financial services in America, Europe and Asia. Its insurance products include life insurance, accident insurance, health insurance, property and casualty insurance, home and automobile insurance and retirement products. The Company also offers savings products, such as pension plan services, annuities, mutual funds and stable value solutions.
On November 2, 2021, AEG announced its commitment to achieve net zero greenhouse gas emissions by 2050 by transferring its €156 billion ($176.9 billion) general account investment portfolio. This will enable AEG to strengthen its group-wide approach to corporate sustainability and help it join the Net-Zero Asset Owner Alliance, a UN-convened group of institutional investors that is committed to moving their portfolios to net zero greenhouse gas emissions.
For its fiscal fourth quarter, ended Dec. 31, 2021, AEG’s operating income increased 6% sequentially to €470 million ($537.37 million). The company’s net income rose 94% year-over-year to 526 million euros ($601.40 million). Additionally, its total gross deposits increased 56% year-over-year to €69.02 million ($78.91 million).
For its 2022 fiscal year, analysts expect AEG’s EPS to rise 10% year-over-year to $0.99. Over the past year, the stock price has gained 30.5% to close the last trading session at $5.69.
AEG’s POWR ratings reflect a strong outlook. The stock has an overall rating of B, which equates to a buy in our proprietary rating system.
It has a B rating for value, momentum and sentiment. It is ranked #4 in the Life insurance industry. To see AEG’s additional ratings for growth, stability and quality, Click here.
MET shares were trading at $71.38 per share on Friday afternoon, up $0.88 (+1.25%). Year-to-date, the MET has gained 15.03%, compared to a -6.80% rise in the benchmark S&P 500 over the same period.
About the Author: Dipanjan Banchur
Ever since he was in elementary school, Dipanjan had been interested in the stock market. This enabled him to obtain a master’s degree in finance and accounting. Currently, as an investment analyst and financial journalist, Dipanjan is particularly interested in reading and analyzing emerging trends in financial markets. Following…