Among the asset classes and industries that would not mind seeing the Federal Reserve raise interest rates are insurance companies.
There are scores of asset classes and sectors that are sensitive to fluctuations in U.S interest rates. As displayed by master limited partnerships (MLPs), real estate investment trusts (REITs) and the utilities sector this year, some favored groups obviously benefit from lower rates. Put insurance stocks and exchange traded funds in the group that is eager to see rates rise. [Insurance ETFs Contend With Low Interest Rates]
Insurance providers “struggled mightily over the last seven years, in large part due to falling long-term interest rates. The S&P 500 insurance sub-index, which includes a dozen life insurance companies and nine property-and-casualty operations, started falling in October 2007, a full year before the financial crisis,” reports Bryan Borzykowski for CNBC. http://www.cnbc.com/id/102063241
While the S&P 500 insurance sub-index has sharply outperformed the benchmark U.S. index since the March 2009 market bottom, as CNBC, there is still opportunity to be had with ETFs such as the SPDR KBW Insurance ETF (NYSEArca: KIE) and the PowerShares KBW Insurance Portfolio (NYSEArca: KBWI). Those two ETFs are down an average of 2.5% this year compared to a 3.4% gain for the Financial Select Sector SPDR (NYSEArca: XLF).
As is the case with regional bank ETFs like the SPDR S&P Regional Banking ETF (NYSEArca: KRE), insurance ETFs are intimately correlated to fluctuations in U.S. Treasury yields. “Insurance companies make a profit off the difference between what it owes the policyholder versus what it can make in the bond market. When rates are high, it makes more money off that spread. When it falls, businesses make less,” according to CNBC.
When 10-year yields surged in 2013, KIE climbed 45.6%, topping the S&P 500 by 1,330 basis points. The iShares US Insurance ETF (NYSEArca: IAK), which features a large combined allocation to American International Group (NYSE: AIG), MetLife (NYSE: MET), Prudential (NYSE: PRU) and Dow component Travelers (NYSE: TRV), climbed nearly 40% last year.