While rising rates are hammering the mREITs hard as they continue to report significant book value declines, insurance giants in the U.S. are enjoying better times. Among the leading gainers are MetLife Inc (NYSE:MET), American International Group Inc (NYSE:AIG), and Genworth Financial Inc (NYSE:GNW). Let’s look in detail how rising rates and capital returns have boosted their stock prices recently.
Best performer
As reported by Bloomberg, Genworth Financial Inc (NYSE:GNW) is the best-performing insurer within the S&P 500 index this year, so far. The company has a presence across 25 countries and provides general insurance, wealth management services, and mortgage insurance to over 15 million customers.
The company reported an 86% increase in its profits during the second quarter. Much of the improvement in the results was due to expense reduction and the company’s mortgage insurance division, which reported second straight quarterly profit after years of losses. At the end of the second quarter, net income came in at $141 million, compared to $76 million at the end of the linked quarter.
Going forward, the company is expected to benefit from rising rates and a final halt in QE3. Genworth Financial Inc (NYSE:GNW) invests in bonds and other fixed income instruments for expected future payouts. With the rise in rates, these bonds and instruments are expected to payout Genworth more than when the rates were kept low. On the other hand, when the Fed exits the housing markets, mortgage issuers will be pushed to get their mortgage insured. This should push Genworth’s sales in the coming quarters.
At 52-week high
Metlife Inc (NYSE:MET), the largest U.S. life insurance provider, is trading at its 52-week high after surging 60% since the beginning of the year. However, its second-quarter performance remained disappointing as rising rates were blamed to be the reason for the decline in the company’s derivatives. Overall, second-quarter profits fell 78%
In order to ensure future payouts to customers, Metlife Inc (NYSE:MET) owns a bond portfolio of $350 billion that makes regular payments to MetLife. The company then uses hedges against any bond, stock, and currency movements. The rising rates cut the value of these hedges significantly during the second quarter. As reported by Bloomberg, these net derivative losses reached $1.1 billion, compared to gains of $1.4 billion a year ago.
Having said that, expenses were managed in an efficient manner during the quarter, which provided partial support to the bottom line. Over the past several months, the company trimmed its adviser force by a third, while some might be moving to North Carolina. At the same time, costs were incurred in Latin America to expand its business. To help boost its return on equity further, the company intends to cut another $600 million in expenses. If implemented, these expense cuts could provide significant support to the net income.
First dividend in five years
American International Group Inc (NYSE:AIG) is one of the largest global insurance companies and provides a variety of insurance products. The company successfully announced its first dividend of $0.10 per share since the 2008 financial crisis when it required a massive bailout from the U.S. government. The announcement of the first dividend in five years came after the company repaid its $182 billion bailout money. The stock is now trading in proximity to its 52-week high after climbing 36% this year.
During the second quarter, the company made $2.73 billion in profit, up 17% from a year ago. The life and retirement unit reported 23% surge in operating profits. Similarly, profits at property-casualty unit surged 16.5% over the prior year. Profits at the company’s mortgage insurance unit surged a massive 70%.
Going forward, the company’s CEO is committed to improving results in the property-casualty unit and for that matter, Bloomberg reports, deals have been struck to expand operations in Turkey and China. Besides, the CEO thinks the company must reduce its debt and bolster its credit ratings before returning more capital to shareholders. For that matter, the company reduced nearly $6 billion in debt since the start of the year. Going forward, once the sale of its aircraft leasing unit to the Chinese consortium is complete, American International Group Inc (NYSE:AIG) would get $3.7 billion in cash, which could mean higher share repurchases.
Conclusion
U.S. insurance giants are enjoying all the benefits of the prevailing macroeconomic environment and the rising rates. The ones considered in this article are trading in proximity to their 52-week highs and I believe that they still have the potential to grow, which means they might create new highs. Rising rates will cause Genworth Financial Inc (NYSE:GNW) to grow its interest income from the bonds portfolio that supports future customer payouts. Efficient expense control at Metlife Inc (NYSE:MET) will help support its bottom line in the coming quarters, and American International Group Inc (NYSE:AIG) can benefit from its renewed focus on property-casualty business in Turkey and China, while debt reduction will de-risk its business vulnerability. So, I am bullish on the aforementioned stocks.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: long January 2014 $25 calls on American International Group.
The article Rising Rates Make These Insurers Strong Buys originally appeared on Fool.com.
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