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Cheap, strong insurance stocks that will gain from rising rates

Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. mike@mikebowmangroup.com

What are we looking for?

While rising interest rates generally hurt corporate earnings growth, insurance companies derive more profits from rising yields. With the ever-present threat of higher rates, my colleague Rob Belanger and I thought we would take a look at the insurance industry today.

The screen

We started with North American insurance companies larger that $1-billion in market capitalization and sorted them from the largest to the smallest.

The price-earnings (P/E) ratio is a valuation ratio of a company's share price compared to its earnings per share. Ideally, we are looking for a low number.

The price-to-book (P/B) ratio compares a stock's market value to its book value. It gives you some idea of whether you are paying too much for what would be left if the company declared bankruptcy immediately. We only included P/B ratios less than two times, and again we are looking for a low number.

The debt-to-equity ratio is the measure of a company's financial leverage. It indicates what portion of equity and debt the company is using to finance its assets. A high ratio generally indicates that a company has been aggressive in financing its growth with debt. We are looking for a low number and only companies with a debt/equity of less than or equal to 1 are included.

Return on equity (ROE) measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. A high number is ideal, and only those companies with an ROE greater than 5 per cent were included.

Companies also had to have a minimum current dividend yield of greater than or equal to 1.5 per cent.

What did we find?

The lowest P/E on our screen belongs to MetLife Inc. The company provides insurance, annuities and employee benefits to customers in more than 50 countries.

Symetra Financial Corp. is based in Bellevue, Wash., and sports the lowest P/B ratio of all our companies.

Georgia-based Aflac Inc. scores the best in ROE. (While headquartered in the U.S., 78 per cent of Aflac's pretax operating profits come from their Japanese operations.)

With a head office in Des Moines, Iowa, and our smallest company by market capitalization, FBL Financial has the best debt-to-equity ratio, and it also scores better than the averages in more categories than any other company.

Investors should conduct further research or contact an investment professional before investing in stocks shown here.

Largest North American insurance companies

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