Hurricanes Harvey and Irma plagued insurance stocks and insurance ETFs last month, but some are already rebounding from their September swoons.
Following news of the hurricanes hitting Texas and Florida, the PowerShares KBW Property & Casualty Insurance Portfolio (NYSEArca: KBWP) tumbled.
However, KBWP, which focuses on property & casualty insurance providers, has rebounded nicely off its September lows. The ETF was able to finish the month with a small loss and finished the third quarter flat. KBWP trades just 5% below its 52-week high.
The ETF tracks the KBW Nasdaq Property & Casualty Index, “a modified market capitalization weighted index that seeks to reflect the performance of approximately 24 property and casualty insurance companies,” according to PowerShares.
KBWB, which carries a five-star Morningstar rating, is fairly evenly spread across large-, mid- and small-cap stocks. The ETF’s top four holdings – Progressive Corp. (NYSE: PGR), Arch Capital (NASDAQ: ACGL), Dow component Travelers Cos. (NYSE: TRV) and Allstate Corp. (NYSE:ALL) – combine for about a third of the insurance ETF’s roster.
Insurance ETFs can also be solid plays when interest rates rise.
Pushing yields higher, many traders anticipate the Federal Reserve to embark on interest rate normalization, with the next major hurdle coming up in December. Supporting the rising rate bets, Philadelphia Fed President Patrick Harker said Friday he still anticipates the central bank to hike rates in December, Reuters reported.
With the markets look toward higher rates, the insurance industry can capitalize on wider margins. The industry has previously been suffering from spread compression on products like universal life and fixed annuities due to the stubbornly low rate environment. With greater investment income, insurers see conditions improve as rates rise.
Since the insurance industry largely targets the domestic economy, a strengthening U.S. dollar will have a lower impact on the sector. Insurance ETFs, sensitive to Treasury yield gyrations in their own regard, are often responsive to rising bond yields. Among industry ETFs that respond positively to rising Treasury yields, perhaps only regional bank funds have been more desperate for rising rates than insurance ETFs.
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