Rising premium rates should ultimately translate into margin expansion and mitigate the negative impact of the still low interest rate environment on insurers’ investment income. Also, insurers now have ample capital to take on new challenges. Further, increasing awareness on the risk of catastrophe, favorable reserve development and efforts to strengthen underwriting discipline should support the industry.
That said, though the market condition isn’t soft anymore, reasonable hardening is not expected at least in the near term. Moreover, stress on balance sheet, lack of real employment growth and legislative challenges are threatening insurers’ ability to rebound to the historical growth rate.
Also, limited organic growth opportunities and more capital for regulatory requirement will push the industry toward consolidation. Insurers are seeking structural economies of scale through mergers and acquisitions to enhance market share. While this will help insurers stay afloat, inter-segment competition will alleviate. So increasing profitability after complying with regulatory requirements would be quite a tall order.
Insurance ETFs to Buy Now
While an investor looking to play the insurance sector to benefit from the sector dynamics can directly invest in attractive insurance stocks, an ETF approach can spread out assets among a variety of companies and reduce company-specific risk at nominal cost. (See: All Financials ETFs)
There are only a few choices in this space among which we recommend the following three ETFs that look attractive at this point with a favorable Zacks Rank.
SPDR S&P Insurance ETF (NYSEARCA:KIE)
KIE closely follows the S&P Insurance Select Industry Index, which is an equal-weight index. Launched in August 2005, the product manages $356.8 million in assets, which are currently invested in 51 securities.
The product charges a reasonable 35 basis points per year in fees. It currently pays out a decent dividend that yields 1.48% annually.
In terms of holdings, over 38% of the assets are invested in the property and casualty insurance sector while life & health account for another 23% of the asset base. Due to the equal-weight methodology, any single security doesn’t account for more than 2.3% of total assets. The fund carries a Zacks ETF Rank #2 (Buy) and a medium level of risk.
iShares U.S. Insurance ETF (NYSEARCA:IAK)
IAK tracks the Dow Jones U.S. Select Insurance Index – a free-float adjusted market capitalization-weighted index. The product was launched in May 2006 and holds 67 stocks in its basket. It has a moderate dividend yield of 1.23% and charges investors 45 basis points a year in fees. With a medium level of risk, the fund holds a Zacks ETF Rank #2.
The ETF is slightly top-holdings focused with more than half of its assets invested in the top 10 securities. From a sector perspective, it is skewed toward property and casualty insurance firms with investments of nearly 50% of the asset base while life insurance companies account for nearly 37% of its assets.
In terms of individual stocks, AIG accounts for about 12% of the fund’s assets, followed by MetLife with nearly 10% and Prudential Financial with over 7%.
PowerShares KBW Insurance Portfolio (NYSEARCA:KBWI)
KBWI follows the KBW Insurance index which comprises 24 insurance companies representing approximately three-quarters of the market capitalization. Incepted in November 2005, the product manages assets worth $12.7 million and charges investors just 35 basis points a year in fees. It pays a decent dividend that yields 1.16% annually.
More than half of its assets are invested in the top 10 of the 24 stocks in its kitty. MetLife occupies the top position with nearly 8% of its assets. The followers are Prudential Financial (about 7%) and Travelers (over 6%).
It carries a Zacks ETF Rank #2 and a low level of risk.
PowerShares KBW Property & Casualty Insurance Fund (NYSEARCA:KBWP)
This fund closely tracks the KBW Property & Casualty Index, a modified market capitalization weighted index, which seeks to reflect the performance of approximately 24 property and casualty insurance companies. Launched in December 2010, the product manages $16.5 million in assets.
The product charges a reasonable 35 basis points per year in fees. It currently pays out a decent dividend that yields 1.74% annually.
More than half of its assets are invested in the top 10 of the 24 stocks in its portfolio. Allstate Corp occupies the top position with over 8% of its assets. The followers are Progressive Corp (nearly 8%) and Travelers (over 7%).
The fund holds a Zacks ETF Rank #2.
This article is brought to you courtesy of Eric Dutram.