The Golden Opportunity The Market Is Overlooking

Any major contagion from mid-March’s banking crisis seems to be contained, at least for the moment. However, that doesn’t mean there haven’t been ripple effects across financially adjacent businesses.

The insurance industry gets lumped into the financial bucket, as far as the market goes, and has been a baby thrown out with the bathwater.

Some insurance ETFs focused on property and casualty or life insurance look like a great buying opportunity.

Before using Maginfi Personal to identify the promising investment vehicles, some backdrop first.

Insurance companies, while often offering a wide variety of financial products, are not banks. The risks plaguing the banks, especially regionals, do not impact insurance companies.

In my opinion, there were a few identifiable red flags ahead of the Silicon Valley Bank (SVB) and Signature Bank (SBNY) collapse. Let’s look at a few of them.

Concentration: The depositors and borrowers all overlapped and were in the same industry, which was flush with free money.

Duration Mismatch: The banks purchased bonds with maturities that would cause the value of the note to drop in the event the Fed jacked up rates rapidly, a move most of us saw coming for quite some time. I mean, the Fed told us as much. At the same time the value of these notes dropped, depositors were frantically trying to withdraw their money, forcing the banks to sell these massive bond portfolios at a loss… a giant one.

Regulators: The regulations that would prevent what occurred were mostly in place, and some warnings were issued as early as October 2021. However, the people that were tasked to do something seemed to shrug off the possibility of something like this happening.

Management: To say the very least, it was poor. SVB didn’t even have a risk manager in place for 9 months leading up to the collapse. C-level exits cashed out $229 million in the two months ahead of the collapse. Enough said…

Insurance companies don’t have any of the first two issues, a bit of the third, and management varies from company to company. Overall, the industry has a very conservative structure, as well as a sound risk/return business model.

A recent report from Fitch reads…

“While the recent and sudden deterioration of several U.S. banks has been most impactful to the depositors, shareholders and lenders to these institutions, non-bank financial institutions, insurance companies and funds have experienced a variety of knock-on effects.”

But the fundamentals, which are different from banks, remain sound and set for growth.

First, life insurance companies don’t have duration mismatches unless a virus comes and kills everyone at once. In that case, we have much bigger problems than the survivability of our financial system.

This speaks to insurance companies’ balance sheets. The only real point of concern was how much they owned in bonds of regional banks. Turns out not too much.

The report from Fitch also says…

“With respect to direct balance sheet, investment portfolio, or counterparty exposures to now-failed banks, it’s a modest degree of exposure and the impacts to earnings and capital are expected to be immaterial.”

Insurance companies might end up being beneficiaries as higher-end customers take their financial planning as an alternative to bundle with insurance policies.

How can I keep an eye on some life insurance & property and casualty focused ETFs? Well, I’m using Magnifi.

The first on my watch list is the Invesco Property & Casualty ETF (KBWP).

As you can see, the ETF took a few lumps alongside its financial counterparts. Yet, if you’re one to take on the contrarian trade, this may be setting you up nicely as a long-term hold. Remember, even in the wake of the 2008 crash, good financial firms rebounded and many investors kicked themselves for not going all in on them.

Next on my list is the iShares Insurance Fund ETF (IAK), which has a modest $900 million under management while owning a diversified portfolio of insurance companies, such as Metlife and Progressive.

Obviously, both charts are going to look very similar, but it’s not the massive decline we are worried about here. The point to be made here is that in the wake of this initial shock to the market, do we expect these companies to clawback gains or not? That is up to the reader to decide, however, I know I’m positioning and I’ll give you a hint, I think they will clawback much of these losses.

Simply put, there will always be a need for insurance.

As the insurance sector emerges stronger from the fall-out of the regional banking chaos it could be presenting a good opportunity for investors to at least be aware of.

But of course, you should not let your research into this battered industry stop there. Complete additional research through Magnifi and let your personal AI investing assistant help you along the way.