2 Simple Ways To Add Some Insurance To Your Portfolio
Insurance stocks are not on most investors’ radar these days, as tech stocks continue to dominate the market. However, there are several factors indicating that the insurance sector is well-positioned to benefit from the current economic environment.
The Federal Reserve is expected to raise interest rates again at its next meeting, which could be a headwind for tech stocks. Insurance companies, on the other hand, can benefit.
Insurance companies generate a significant portion of their revenue through investing the premiums they collect. When interest rates rise, insurers can reinvest their funds at higher rates, leading to increased investment income and profits.
After collecting premiums from policyholders, insurance companies invest the portion of those funds that have not yet been paid out in claims, known as the float, into safe, short-term fixed income instruments. As interest rates rise, the value of these investments also rises, generating income for the insurance companies.
There is also growing demand for life insurance with an aging population becoming more concerned about protecting their financial assets.
The premiums they receive are typically paid for many years before a claim is even paid out on a relatively small number of actual claims.This gives insurance companies time to invest the premiums increasing their profits.
Insurance ETFs can be a good way to gain exposure to the insurance industry, which besides life insurance includes health insurance, property and casualty, as well as reinsurance. This broader exposure can smooth out the inherent risks of investing in any one particular company.
The SPDR S&P Insurance ETF (KIE) is one of the largest insurance ETFs in the sector. It holds an equal-weight of no more than 3% each of its 50 holdings.
Companies in KIE’s lineup include the following: Insurance Brokers, Life & Health Insurance, Multi-Line Insurance, Property & Casualty Insurance and Reinsurance.
Holdings include Metlife (MET), Prudential Financial (PRU), and American Equity Investment Life Holding Co (AEL).
The stock made a low of 37 in March of this year and has since rallied over 11%.The fund has a low expense ratio of 0.35% with assets under management of 463 million.
The second ETF investors can consider is The iShares U.S. Insurance ETF (IAK) a market-cap weighted ETF, which means that each holding in the index is weighted according to its market capitalization. This gives the ETF a more concentrated exposure to the largest insurance companies in the United States.
According to the prospectus, companies should have a market cap of at least $250 million and be subject to 22.5% cap with the rest redistributed proportionally. The index is rebalanced quarterly.
IAK’s top ten holdings total 61.95% of the ETF and include the two largest property & casualty insurers Chubb (CB) at 23% and Progressive (PGR) at 11%.
One of attractive, if somewhat controversial, aspects of P&C business is their ability to be price makers rather than price takers. Meaning, they set premiums at rates that almost ensure profitability. And as we’ve seen over the past few years if a market, such as hurricane insurance in Florida homeowners, is not attractive they simply exit the market.
The IAK being a more concentrated fund as it has higher weightings on fewer stocks than the KIE fund is more likely to be volatile, but also has the potential for higher returns.
The expense ratio is also a low 0.39%. Assets under management a little less at 356 million. Performance has been similar with KIE gaining near 12% since its March low.
While insurance stocks may not be in the limelight, investors should consider the potential advantages of diversifying their portfolios by including insurance companies.
Take your analysis one step further by comparing these two ETFs side by side to see which you think has a spot in your portfolio.
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