With 2017 Â almost over, investors have many reasons to cheer. The economic backdrop has improved with GDP rising, improving employment scenario and major indices gaining year to date. While the S&P 500 has rallied 20.3%, Nasdaq has gained 12.3%.
Gross domestic product (GDP) rose 3.3% in the third quarter of 2017, a nice pickup from 3.1% in the second quarter. The Fed now estimates GDP to grow at 2.5% in both 2017 and 2018, reflecting an increase of 2.4% for 2017 and 2.1% for 2018, projected earlier. The Fed officials expect the unemployment rate to grow at 4.1% for 2017 while the same is likely to decline to 3.9% in 2018 and 2019.
The Fed has kept its promise of three rate hikes this year, reflecting President Donald Trump’s bias for higher interest rates and the Fed’s confidence in the progressing U.S. economy. The interest rate now stands at 1.25-1.50% after hikes in March, June and December. The outgoing Fed chairperson Janet Yellen reiterated the expectation to raise rates thrice in 2018 and twice in 2019.
Insurers are major beneficiaries of an improving rate environment. Life insurers are sensitive to interest rates. They have suffered spread compression on products like fixed annuities and universal life due to persistently low rates. To withstand the unfavorable environment, they have gradually shifted to riskier asset like equities only to fetch in more returns from the policyholders’ claims and even lowered exposure to interest-sensitive product lines. Life insurers have redesigned and re-priced products, which should help them write higher premiums.
Stronger corporate bonds and bettering real estate market might aid to curtail the credit-related investment losses. Also, the improving economy and higher inflation induced bonds look to yield good returns. In fact, a progressing economy indicates more disposable income with people opting for more insurance coverage.
The Life Insurance industry is currently ranked at #54 (out of 265 Zacks Industry), representing the top 20% of the Zacks Industry Rank. The industry has outperformed the S&P 500 in a year by registering a 24.5% rally so far this year, thereby outperforming the elite index.
