Despite a surprise downward revision to the first quarter GDP growth rate, the US economic picture has been improving. Recent economic numbers—particularly in areas of housing, labor markets and consumer spending—have been upbeat and point to a stronger second quarter. It appears that the impact of tax hike and sequester was not as bad as earlier feared.
Improving economic picture is positive for all insurers as their business volume is highly correlated to the health of the economy. Further, improvement in the labor market is also positive for all insurers but benefits health insurers the most. (Read: 3 Sector ETFs to profit from rising rates)
Insurers also stand to benefit from the rising rate scenario. Many insurance companies—life insurance companies in particular—invest in longer-duration bonds and have thus been hurt by low interest rates. Higher interest rates will enable these companies to earn higher returns on their investment portfolio.
At the same time, the value of long duration bonds in insurers’ portfolio will go down as rates go up, however since these companies have very long-term investment horizons, they can hold investments till maturity and no losses are actually realized. (Read: 3 ETFs to buy for Obama’s climate change plan)
According to a recent report from the Property Casualty Insures of America, U.S. property/casualty insurers’ net income rose to $14.4 billion in Q1 2013 from $10.2 billion in Q1 2012, while their annualized rate of return surged to 9.6% from 7.2%. The improvement was largely driven by $4.6 billion in net gains on underwriting from $0.1 billion in net losses on the prior-year quarter.
Property & Casualty insurers appear poised for a strong top-line growth this year, as premiums have been rising in mid-single digits—a trend that may gain momentum this year. (Read: Forget dividends, focus on buybacks)
The outlook for Life insurers also appears to be brightening now, albeit slowly. Per Fitch Ratings, the sector's strong balance sheet fundamentals and improved liquidity profile help mitigate ongoing concerns over challenging macroeconomic conditions pressuring industry operating fundamentals.
As a result of improved outlook, analysts have been raising estimates for insurance companies. Insurance industry looks very well poised to outperform in the coming months from the Zacks M industry rank (1 out of 63) perspective too.
Below we have analyzed three ETFs that provide a diversified exposure to the insurance sector.
SPDR S&P Insurance ETF (KIE - ETF report)
KIE follows the S&P Insurance Select Industry Index, which is an equal weight index. Launched in August 2005, the product has amassed $322.8 million in assets, which are currently invested in 46 securities.
The product charges a reasonable 35 basis points per year in fees. It currently pays out a decent dividend of 2.01%.
In terms of holdings, about 39% of the assets are invested property and casualty insurance sector while life & health account for another 20% of the asset base. Due to the equal weight methodology, no one security accounts for more than 2.4% of assets.
Dow Jones U.S. Insurance Index Fund (IAK)
IAK tracks the Dow Jones U.S. Select Insurance Index, holding 68 stocks in its basket and charging investors 45 basis points a year in fees.
The ETF is a bit top heavy with close to 60% of assets in the top ten securities. From sector perspective, it is tilted towards property and casualty insurance firms, which accounts for about 50% of the asset base while life insurance companies hold about 34%.
In terms of individual holdings, AIG (11.9%) occupies the top spot, followed by MetLife (9.4%) and Prudential Financial (6.5%). The yield is moderate at 1.33% currently.
PowerShares KBW Insurance Portfolio
KBWI follows the KBW Insurance index which is comprised of 24 insurance companies. The product charges investors just 35 basis points a year in fees, while the yield is also nice at 1.9%.
Metlife, Travelers, Chubb, Prudential and Aflac are the top five holdings. In terms of sectors, property and casualty insurance companies accounts for about 42% of the asset base while life and health insurance companies hold about 31% of assets.
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