The dying days of August saw a sense of unadulterated panic return to equity markets as the bubble in Chinese stocks appeared to burst, while many of the available economic indicators continued to point toward a further slowdown in the world’s second largest economy throughout the remainder of 2015.
In tandem with the contagious effect of chaos in China, further reductions in unemployment and strong wage growth in the US during August have prompted several hawkish statements from FOMC rate setters — which also means that the possibility of a 2015 rate hike is now a reality.
As a result, equity markets on both sides of the Atlantic fell to multi-year lows during the month of August, no doubt prompting some investors to begin considering where they will turn to if the Chinese economy does slow further or when interest rates do actually begin to rise in the West.
Insurance companies are worth looking at, particularly those on the non-life side of the sector
For those seeking a reasonably safe haven for their capital in the equity market, insurance companies could be worth looking at.
This is because before interest rates hit rock-bottom in the aftermath of the financial crisis, many insurers derived a considerable portion of their earnings from the investment income provided by their bond portfolios.
Now that the winds of monetary policy are finally beginning to change, the industry will be one of the fortunate few to actually benefit from higher interest rates.
While there may be some benefit to companies like Aviva and Standard Life, the case is stronger for companies like Hiscox, Beazley, RSA Insurance Group, Esure Group and Direct Line Insurance Group, who tend to hold only shorter dated bonds.
Short dated bonds are great in a rising rate environment because the lower time until maturity means that insurers will often be able to hold them until redemption, instead of selling them back to the market at a loss after rates change.
This is because regular new issuance means that these bonds will also be among the first to eventually begin to display higher coupons.
Both of these factors hold positive connotations for earnings in across the non-life insurance sector.
Valuations at some insurance companies are highly attractive — particularly in relation to the banks!
If the scope for earnings growth was not enough for some investors, then maybe these individuals will find the low valuations across the sector more encouraging.
This is because the average forward P/E multiple for the above referenced group of companies is just 13.8x the consensus for 2015 earnings, which is only a short distance ahead of the lumbering banking sector.
Such a differential is of particular interest to this Fool when considering that the banks remain dogged in a quagmire of scandal and are often quite rightly lambasted for their inability to generate meaningful returns on equity..!