Why S&P Likes Insurance ETFs
August 9th at 11:20am by Tom Lydon
A slew of economic fundamentals are in place that will benefit life insurers, and related exchange traded funds, throughout the remainder of 2013. S&P Capital has a positive outlook on this sub-sector as the S&P Life and Health Insurance Index has risen 46.8% versus 20.3% for the broad market S&P 500 Index.
“Although we expect low interest rates to continue to weigh on net interest income in the near term, we expect the pressure to ease as interest rates now appear more likely to rise than fall, which should lead to greater new money investment yields. Since insurance companies invest a significant portion of their assets in fixed income securities, changes in interest rates can have a meaningful impact on net investment income, which is a significant component of total revenue,” S&P Capital wrote in a recent note.
Insurers have been streamlining their processes to create more profitability within their operations. ETFs such as the iShares US Insurance ETF (NYSEArca: IAK) is currently rated “Overweight” by the ratings company. Companies within this sub-sector are expected to raise dividends in response to any excess capital earned. Share re-purchases are expected to remain healthy within the life insurance sub-sector. IAK has gained 20% over the past 6 months. [Insurance ETFs for Rising Interest Rates]
The SPDR KBW Insurance ETF (NYSEArca: KIE) also tracks the insurance sub-sector and is ranked “Overweight” based on performance and cost factors by S&P Capital. The ETF is up 17.4% over the past 6 months.
Some of the most diversified life insurance companies are poised to benefit from projected interest rate hikes later in the year. Diversified companies are those that offer 401(k) benefits, pensions and asset management, along with insurance. The more diversified insurers become, the more they can benefit from stronger stock markets. [Large-Cap Equity ETFs Outperforming in 2013]
Ongoing product restructuring, higher prices and higher interest rates are going to help boost revenues and expenses for the insurance industry. Insurance companies invest a large portion of their assets into fixed income securities so a spike in rates would prove beneficial. [Breaking Down First Quarter ETF Flows]
iShares US Insurance ETF
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.