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Insurance ETFs At 52-Week Highs: More Gains Ahead?
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Over the last few years, most insurance companies and their stocks have proven their mettle as evident from the performance of SPDR S&P Insurance ETF (KIE - Free Report) . The fund has added 32.8% in the past two years (versus a gain 8.2% in the S&P 500), 6.7% in the past year (versus a loss of 11% in the S&P 500) and 4.4% this year (against a rise of 4.6% in the S&P 500) (as of Jan 31, 2023).
Both iShares U.S. Insurance ETF (IAK - Free Report) and KIE are now trading at 52-week high levels. Let’s see if these can soar higher.
Inside the Gains
Rising Rate Environment
Insurance stocks are among the prime beneficiaries of rising rates, as these are able to earn higher returns on their investment portfolio of longer-duration bonds. At the same time, these firms incur a loss as the value of longer-duration bonds goes down with rising interest rates. Nevertheless, since insurance companies have long-term investment horizons, they can hold investments until maturity and hence, no actual losses will be realized.
The Fed already made seven rate hikes in 2022 and one rate hike in 2023. As of Jan 31, 2023, the benchmark U.S. treasury yield was 3.52% versus 1.63% recorded at the start of 2022. Yield on the same duration treasury bond even hit a high of 4.25% in late October 2022. Average Yield to Maturity of iShares 20+ Year Treasury Bond ETF (TLT - Free Report) was 3.75% as of Jan 30, 2023. Such a spike in yield explains how the rising rate environment in 2022 went in favor of insurance companies.
Higher Pricing
Global commercial insurance prices rose for 20 straight quarters though the magnitude of hike has slowed down over the last seven quarters, per Marsh Global Insurance Market Index. Global prices gained 6% in the third quarter of 2022. The United States recorded a 5% uptick (compared with 10% gains in the prior quarter).
Growing Mergers and Acquisitions
The M&A environment has been robust for the space. Deal volume involving insurance agents and brokers, increased to 427 in the first half of 2022 (which is a down year for deals), marking a 16% gain over the same period last year and 13% above the first-half five-year average, per Deloitte. Buying businesses along the same lines will also continue as players look to gain market share.
Increased Adoption of Technology
The industry is witnessing increased use of technology like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing and robotic process automation that expedite business operations and save cost. The industry has also witnessed the emergence of insurtech — technology-led insurers — creating competition for incumbent players.
Opportunities in the Sector
Cyber insurance pricing gains have been most notable. Cyber insurance pricing increased 48% in the third quarter compared with 79% in the prior quarter. Coverage for emergent exposures among intangible assets such as cryptocurrency, nonfungible tokens, and virtual activities on the metaverse hold immense opportunities for the space in the coming days, per Deloitte.
Any Wall of Worry?
The Fed is expected to slow down the rate hike momentum in 2023. This may not go in favor of the insurance companies. Plus, the pricing hikes have also been sluggish for the past few quarters. In face of stubborn inflation, this scenario may not prove to be beneficial for the insurance funds.
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Insurance ETFs At 52-Week Highs: More Gains Ahead?
Over the last few years, most insurance companies and their stocks have proven their mettle as evident from the performance of SPDR S&P Insurance ETF (KIE - Free Report) . The fund has added 32.8% in the past two years (versus a gain 8.2% in the S&P 500), 6.7% in the past year (versus a loss of 11% in the S&P 500) and 4.4% this year (against a rise of 4.6% in the S&P 500) (as of Jan 31, 2023).
Both iShares U.S. Insurance ETF (IAK - Free Report) and KIE are now trading at 52-week high levels. Let’s see if these can soar higher.
Inside the Gains
Rising Rate Environment
Insurance stocks are among the prime beneficiaries of rising rates, as these are able to earn higher returns on their investment portfolio of longer-duration bonds. At the same time, these firms incur a loss as the value of longer-duration bonds goes down with rising interest rates. Nevertheless, since insurance companies have long-term investment horizons, they can hold investments until maturity and hence, no actual losses will be realized.
The Fed already made seven rate hikes in 2022 and one rate hike in 2023. As of Jan 31, 2023, the benchmark U.S. treasury yield was 3.52% versus 1.63% recorded at the start of 2022. Yield on the same duration treasury bond even hit a high of 4.25% in late October 2022. Average Yield to Maturity of iShares 20+ Year Treasury Bond ETF (TLT - Free Report) was 3.75% as of Jan 30, 2023. Such a spike in yield explains how the rising rate environment in 2022 went in favor of insurance companies.
Higher Pricing
Global commercial insurance prices rose for 20 straight quarters though the magnitude of hike has slowed down over the last seven quarters, per Marsh Global Insurance Market Index. Global prices gained 6% in the third quarter of 2022. The United States recorded a 5% uptick (compared with 10% gains in the prior quarter).
Growing Mergers and Acquisitions
The M&A environment has been robust for the space. Deal volume involving insurance agents and brokers, increased to 427 in the first half of 2022 (which is a down year for deals), marking a 16% gain over the same period last year and 13% above the first-half five-year average, per Deloitte. Buying businesses along the same lines will also continue as players look to gain market share.
Increased Adoption of Technology
The industry is witnessing increased use of technology like blockchain, artificial intelligence, advanced analytics, telematics, cloud computing and robotic process automation that expedite business operations and save cost. The industry has also witnessed the emergence of insurtech — technology-led insurers — creating competition for incumbent players.
Opportunities in the Sector
Cyber insurance pricing gains have been most notable. Cyber insurance pricing increased 48% in the third quarter compared with 79% in the prior quarter. Coverage for emergent exposures among intangible assets such as cryptocurrency, nonfungible tokens, and virtual activities on the metaverse hold immense opportunities for the space in the coming days, per Deloitte.
Any Wall of Worry?
The Fed is expected to slow down the rate hike momentum in 2023. This may not go in favor of the insurance companies. Plus, the pricing hikes have also been sluggish for the past few quarters. In face of stubborn inflation, this scenario may not prove to be beneficial for the insurance funds.