Harry Domash, Online Investing | Rising interest rates drive up insurance company profits – Santa Cruz Sentinel
Many economists predict continued high inflation, which translates into higher interest rates, at least for the next few months. Although considered bad for the overall market, insurance stocks are an exception. Why?
Insurance companies are required to invest excess cash in US government bonds or bonds rated as investment grade in order to have funds readily available to pay claims. In fact, the income of insurance companies comes mainly from the interest generated by these bond holdings, and not from the premiums collected for the subscription of policies.
So when interest rates rise, insurance company revenues also rise. It’s that simple.
So I’m going to outline a stock screen that you could use to identify high-priced, high-dividend insurance company stocks that are in favor of connected institutional investors as well as stock analysts.
As usual, I’ll be using the free, user-friendly finviz stock filter to demonstrate the process, but you can use one of many other web filters to get the job done.
Set up a filter: search for the filter by selecting the Filter option on the finviz homepage (finviz.com). You control the finviz filter using “filters” to find stocks that meet your selection criteria. Start by selecting “All” in the filter bar to see the available filters.
Start by using the “Country” filter and select “United States” to limit your list to stocks based in the United States. For reasons that will become apparent later, we will wait until the end to specify the “insurance industry” values.
Valuation: For insurance companies, book value, primarily the value of their bond holdings, is the best valuation measure. So use the price/pound filter (labeled P/B) and specify “less than 1” to limit the list to stocks that are relatively high in price.
Dividends: Most insurance companies pay large dividends. So, use the “Dividend yield” to specify “More than 3%”. Later, you can adjust this value down if you want to limit your list to a longer candidate list.
Investor Sentiment: Use the ‘Institutional Ownership’ filter and specify ‘Over 50%’ to limit your list to actions in favor of hardwired big players.
Then, rather than analyzing financial statements, specify “Buy or Better” using the “Analyst Recommendations” filter to limit your list to stocks that analysts, who spend their days doing this, advise buying.
Specify insurance companies: Rather than one category for all insurance companies, finviz lists six different insurance industry categories. Those relevant to us include: Diversified, Life, P&C and Specialty. Thus, you must choose each of these four categories separately to see all passing stocks.
Candidates: My screen revealed three candidates: Heritage Insurance Holdings (HRTG) and Kingstone Companies (KINS) from the Radian Group Damages (RDN) category in the Specialty category.
Think of the stocks listed by this screen, or any screen for that matter, as search candidates, not a shopping list. The more you know about your actions, the better your results.
Aptos’ Harry Domash publishes Winning Investing and Dividend Detective sites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see Domash’s previous columns, visit santacruzsentinel.com/topic/Harry_Domash.