As the US West Coast continues to burn and hurricane season intensifies, with hurricanes Sally, Isaias, Laura, Paulette, Alpha, Beta, Teddy and others making headlines, the potential for massive amounts of damage is manifold. For those on the ground, loss of life, property and property are the most devastating aspects of such calamities.
From an economic perspective, there are several costs associated with such contingencies. According to United Policyholders (UP), a nonprofit advocacy group, the recent wildfires will "likely cost insurers between $ 7.5 billion and $ 10 billion." Ultimately, the total economic cost is likely to be much higher, given the loss of human and animal lives and the impact on the environment.
Another huge risk affecting the global economy: coronavirus. The global pandemic has brought the importance of health insurance to the forefront.
With risks looming in an increasingly dangerous world, the demand for insurance is growing rapidly. And it is not only because of the increased dangers from natural disasters and viruses, but also in developing countries with a large and growing middle class, such as China.
For all these reasons, insurance companies are ideally positioned to capitalize on the growing demand for their services, given the high profit potential of their business models. Even with increasing risk, the majority of people who pay insurance premiums rarely file claims, making the business model for insurance companies increasingly profitable.
Today we will dive into the insurance industry from an investment standpoint and introduce two exchange-traded funds (ETFs) that should be on your radar:
Size Of The Industry
In 2018, net written premiums in the insurance industry in the US, the world's largest insurance market, were $ 1.22 trillion. However, in the last decade, China has “almost tripled its share of the world market. In contrast, the share of mature markets (North America, Western Europe and Japan) declined by about 14 pp. "
The industry employs nearly 3 million people in the United States, where there are approximately 6,000 insurance companies. Property / Accident Insurance (P / C) – primarily auto, homeowner, and commercial insurance – account for about 40% of businesses. Net written premiums for the industry totaled $ 618.0 billion in 2018.
As with the rest of the companies, health and life / annuity insurers make up 15% and 13% respectively.
The Life / Annuity subsector consists of annuity, accident and health, and life insurance. However, there are also companies that specialize in health insurance.
Lloyd & # 39; s of London, also known as Lloyd & # 39; s, is the world's largest insurance and reinsurance market entity.
Liability Driven Market
Like buying insurance, investing in the industry can sometimes seem daunting. It is important for investors to consider the different characteristics of the market. Insurance companies are part of the financial services industry. However, there are differences between them and, for example, because they have a range of future liabilities to pay in the event of a qualifying insurance claim, making them liability driven.
Insurance companies also rigorously apply asset-liability management, which differs from asset-only management strategies that aim to minimize portfolio risk and maximize returns.
Since insurers must invest premiums conservatively so that claims can be easily met when they are due, they invest in fixed income securities, such as US Treasuries and AAA-rated bonds of large companies. Interest rates understandably affect the maturity and maturity of the bonds in their portfolios.
Their choice of portfolio positions may also depend on the insurance offered. For example, life insurers by definition commit to payments in the decades to come. While long-term liabilities also allow for a longer investment horizon, a pandemic like COVID-19 can directly affect their liabilities. Or if the bonds in portfolios are cut, the capital requirements for insurers could change, putting financial stability under pressure. As a result, both insurers' risk appetite and premium rates can be affected.
1. Invesco KBW Property & Casualty Insurance ETF
Current price: $ 54.72
52 Week Range: $ 44.46 – $ 76.48
Dividend Yield: 2.42%
Expense ratio: 0.35%
The Invesco KBW Property & Casualty Insurance ETF (NASDAQ 🙂 provides exposure to a range of property and casualty insurance companies.
KBWP, which has 24 holdings, tracks the KBW NASDAQ Property & Casualty index. Since it is a market capitalization weighted index, no holding represents more than 9% of its assets.
The top ten names make up about 60% of the fund. Progressive (NYSE :), Allstate (NYSE :), Travelers Companies, (NYSE :), Chubb (NYSE 🙂 8.02% and American International Group (NYSE 🙂 top the list of companies in KBWP.
In the sub-sectors, the funds are divided between property and casualty insurance (69.6%), multi-line insurance (21.62%) and reinsurance (8.78%).
Year-to-date, the fund is down about 22%. The underlying P / E and P / B ratios stand at 12.72 and 1.05. Opposite investors who are also looking for value may want to put KBWP on their shopping list. As part of portfolio diversification, we would consider buying the dips.
2. SPDR S&P Insurance ETF
Current price: $ 27.02
52 Week Range: $ 20.23 – $ 37.57
Dividend Yield: 2.77%
Expense ratio: 0.35%
The S&P Insurance ETF (NYSE 🙂 provides exposure to a wide variety of insurance companies.
KIE, which has 50 companies, tracks the index. The top 10 companies comprise approximately 22% of assets under management, which equates to $ 502 million. In other words, regardless of market capitalization, companies have an equal weight in the portfolio, each weighing about 2%.
eHealth (NASDAQ :), Arthur J Gallagher & Co (NYSE :), Assurant (NYSE: NYSE 🙂 and Marsh & McLennan Companies (NYSE 🙂 are the top five names in the fund. The subsectors include property and casualty insurance (43.24%), life and health insurance (25.01%), insurance brokers (13.70%), reinsurance (9.30%) and multi-line insurance (8.74%) .
The allocation shows that the fund invests in all companies that have an insurance component, including insurance brokers. Investors should ideally review their investment objectives to see if they want this type of diversification.
Since the beginning of the year, the fund has also fallen by 22%. As a result, the lagging P / E and P / B ratios are 10.88 and 0.72, respectively. We believe the fund provides value around these levels.
