As the Federal Reserve is not expected to stop its economic hand-holding anytime soon, the prolonged low-interest rate environment will continue to hurt the rate-sensitive part of insurers’ business models. However, continued efforts to transform the business model to compensate for the setback caused by the low-rate environment will certainly give insurers a new lease of life.
Insurers have been working hard to meet increased life expectancy. The strength that the industry has built up so far should work in favor of the sector ETFs, helping them to outperform the broader market. So it’s better to look at any short-term price correction due to economic reasons as a good entry point.
Before zeroing in on the top ETFs in the sector, let us see how the sector is shaping up.
The U.S. insurance industry continues to gain traction on earnings growth and risk management across the board, thanks to better premium rates after prolonged softness since the height of the financial crisis. Further, favorable reserve development and modest catastrophe losses helped insurers show potency in 2013.
The sector is set to reach a favorable pricing cycle with assured improvement in pricing power as demand from economically recuperating American households rise. But a dearth of catalysts is holding back growth. Among the fundamental challenges, weak underwriting gains and low investment yields stand out.
Though modest catastrophe losses helped the industry to witness significant recovery in underwriting and lower combined ratio in 2013, underwriting performance is expected to remain subdued in 2014. This, along with heightened market competition, will drag earnings improvement.
Insurers continue to prepare themselves better to buttress drastic losses from catastrophes, but increasing probability of such incidents continues to raise concerns. Some analysts expect catastrophic losses to double every 10 years and the pace of capacity buildup by the insurers to be insufficient to withstand the resulting insured losses. (Read: Beat the Cold Weather with These Hot Sector ETFs)
However, the overall health of the industry improved to a great extent in the recent past riding on improved macroeconomic trends, after enduring pricing pressures and reduced insured exposure since the latest recession. Moreover, learning from past experiences, insurers are now resorting to expense saving measures for bottom-line growth.