Insurance stocks poised to shine amid higher interest rates and inflation

While many businesses and consumers have felt the sting of higher interest rates and inflation, Fidelity Portfolio Manager Fahim Razzaque says insurance stocks can do well in such an environment because the category is less sensitive to the health of the economy than most others.

“Rising interest rates can be neutral for some segments of the insurance industry and beneficial for others, particularly life insurance,” says Razzaque, who manages Fidelity® Select Insurance Portfolio (FSPCX). “That’s because when customers pay their premiums, the insurers take that money and invest it, primarily in bonds. As older bond holdings periodically roll off, new bonds bring better yields and boost the firms’ investment income.”

The narrowly focused Select Portfolio primarily invests in U.S. companies engaged in underwriting, reinsuring, selling, distributing, or placing insurance, including property, casualty, life, and health.

In helming the fund since 2022, Razzaque favors insurance stocks that he believes are well-positioned to increase book value over time, driven by return on equity, reinvestment opportunities, valuation, and avoiding downside risk.

“Insurance companies are essentially intermediaries that pass on the higher cost of paying claims,” he explains. “When claims costs rise, insurance carriers initially must absorb these higher costs, but they’re usually able to raise premiums to offset loss costs and protect their profit margin.”

Recently, insurers have been raising premiums for property and auto policies to offset higher costs from inflation and more-frequent and costly natural disasters, but it can take a while to see the full revenue impact of higher rates, according to Razzaque.

“First, state regulators must approve rate increases, and then it takes additional time for insurers to begin collecting higher premiums as existing policies wind down and are renewed at the new rates,” he says.

Razzaque believes it will take another year or two for property & casualty insurers to see the full benefit from raising prices, but he’s confident that premiums will continue to rise and, over time, will exceed loss costs, which he thinks could benefit insurer profitability.

P&C insurance was the fund’s largest subindustry allocation as of December 31, at about 48% of assets, led by sizable stakes in Chubb (CB), Travelers (TRV), Hartford Financial Services Group (HIG), Allstate (ALL), and American Financial Group (AFG)—all top-10 holdings.

Insurance brokers is another category that can benefit from inflation, says Razzaque, noting that they collect commissions on the insurance they sell, so their revenue goes up as life insurers and property & casualty insurers raise their rates to cover higher claims costs.

At the end of December, brokers represented 26% of the fund. Marsh & McLennan (MMC) was the fund’s top holding, at roughly 11% of assets, while Arthur J. Gallagher (AJG) was the fund’s No.5 holding.

With the economy potentially headed for a recession and the outlook for many sectors challenged, Razzaque believes insurance companies can continue to offer solid performance. “These are reliable businesses with sound fundamentals and steady revenue,” he contends.

For specific fund information, including full holdings, please click on the fund trading symbol above.

Fahim Razzaque
Fahim Razzaque
Portfolio Manager

Fahim Razzaque is a research analyst and portfolio manager in the Equity division at Fidelity Investments.

In this role, Mr. Razzaque covers insurance stocks and is the portfolio manager of the Fidelity Select Insurance Portfolio.

Prior to assuming his current position, Mr. Razzaque was a managing director of research and oversaw the Small Cap Analyst Team. He co-managed Fidelity Enduring Opportunities Fund, Fidelity Disruptive Automation Fund, Fidelity Disruptive Communications Fund, Fidelity Disruptive Finance Fund, Fidelity Disruptive Medicine Fund, Fidelity Disruptive Technology Fund, and Fidelity Disruptors Fund.

Before joining Fidelity Investments in August 2008, Mr. Razzaque worked as an equity research intern at Adage Capital Management in 2007, as a senior engineer at Qualcomm from 2004 to 2006, and as an electrical engineer at HP from 2001 to 2004. He has been in the financial industry since 2007.

Mr. Razzaque earned his bachelor of science degree in computer engineering from the University of Michigan, his master of science degree in electrical and computer engineering from the Georgia Institute of Technology, and his master of business administration degree in finance from Cornell University. He is also a CFA® charterholder.

Interested in mutual funds?

Choose your criteria and get fund picks from Fidelity or independent experts.

More to explore

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Growth stocks can perform differently from the market as a whole and other types of stocks, and can be more volatile than other types of stocks.

Value stocks can perform differently from other types of stocks, and can continue to be undervalued by the market for long periods of time.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.

The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities.

The securities of smaller, less well known companies can be more volatile than those of larger companies.

Some funds may use investment strategies involving derivatives and other transactions that may have a leveraging effect on the fund. Leverage can increase market exposure and magnify investment risk. Investors should be aware that there is no assurance that a fund's use of such strategies will succeed.

Leverage can magnify the impact of adverse issuer, political, regulatory, market, or economic developments on a company. In the event of bankruptcy, a company's creditors take precedence over its stockholders.

Changes in real estate values or economic conditions can have a positive or negative effect on issuers in the real estate industry.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Past performance is no guarantee of future results.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917