Almost everyone knows that Jerome Powell and the Federal Open Market Committee (FOMC) are set to meet and lower interest rates this week on Wednesday.
Most investors think that the move will give a boost to stocks, and for the most part they’re right.
But when you dig down into the data for the markets, there are a few sectors that will benefit more from lower rates.
Regional Banks, Real Estate Investment Trusts, Gold and a few others are high on the list, but a lot of investors overlook one group, insurance companies.
You’ve felt it, so have I. We’re paying more for our insurance premiums.
Inflation hit hard on the rates to cover everything from our holes to apartments to cars, and let’s face it the rates aren’t going to go any lower.
That situation has put the insurance companies in a strong position.
With rates starting to move lower, insurance companies are likely to start benefiting from the inverse relationship between bond prices and rates. That’s going to help their bottom line.
Years ago, lower rates affected insurance companies in several ways. For our purposes, we’ll stick with property & casualty companies.
The companies put premiums collected to work to earn interest by investing in low-risk bond portfolios. Before rates shot higher, insurers like Progressive (PGR) and Allstate (ALL) would have to squeak by on lower interest earnings to help pay their liabilities and claims.
That changed as rates shot through the roof. Those portfolio managers got busy reallocating their portfolios to take advantage of higher interest rates, something that will help to carry their balance sheets for years.
Lowering rates will now bolster the value of the bonds in those portfolios, helping their capital positions.
Combine that with the fact that they aren’t going to be lowering rates for you and I and you have the potential for revenue and profits to go higher.
They don’t happen often, but the “salad days” appear to be here for insurance companies.
Last week, I laid out the idea behind considering the SPDR S&P Insurance ETF (KIE) as an attractive low volatility high growth position. If you missed the story, read it here.
The ETF is constructed of about 50 companies in the insurance sector and has posted year-to-date returns of 26%.
But what about the stock investors that are looking for a few attractive names in the sector?
Mayfield Ohio based Progressive Insurance sits at the top of my “Best in Breed” list for the insurance sector.
Fundamentally, the company has continued to grow both revenue and earnings per share through the latest interest rate drought.
Last quarter’s results bear analyst expectations on both measurements after the company grew revenue by more than 20% on a year-over-year basis.
Investors should expect that the lower interest rate environment will continue to assist Progressive in growing revenue as revenue from the company’s bond portfolio should continue to improve.
Technicians should be falling over themselves to get into a stock with a chart as strong as Progressive’s.
From a short- and intermediate-term perspective, Progressive shares have support from their bullish 50- and 200-day moving averages.
The stock last tested that support in July and August ahead of a 10% rally after Jerome Powell appeared to give a nod that lower interest rates were on the docket for the upcoming September FOMC meeting.
From a longer-term perspective, PGR shares have been in a long-term bull market rally for more than ten years as they remain above their 20-month moving average.
This is a trade that is attractive for both stock and option traders.
Stock traders should expect that the short-term outperformance will continue.
As of now, the current analyst recommendation for Progressive is a buy, but there are plenty of “hold” recommendations. This means that the stock is not “over loved” like some of the large cap technology names.
Similarly, the average Wall Street target price is $255, below the current price of Progressive shares.
Expect that to change as analysts will begin upgrading their price targets which will in turn attract more buyers.
Options traders may want to consider holding longer dated LEAPs on the stock.
Given its low volatility, options on Progressive are less expensive than technology stocks. This plays in favor to the long-term options holders.
The January 16, 2026, PGR $270 calls are offered for a price of $3,200 per contract.
That price controls 100 shares of PGR stock – a value of $25,000 – until the third Friday of January 2026. Essentially, it’s a less expensive way to build a large position in Progressive without the large outlay of case.
At a target price of $350 for Progressive, that option would be worth a minimum of $8,000 at expiration. The owner could also choose to exercise the option at any time if they wish to hold Progressive for an even longer period.
As always, please make sure you have the education and experience needed to execute any options strategy in your portfolio.
Progressive maintains a long-term bullish outlook with a price target of $350
