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Insurance stocks are not on most investors’ radar these days, as tech stocks continue to dominate the market. However, there are several factors indicating that the insurance sector is well-positioned to benefit from the current economic environment.
The Federal Reserve is expected to raise interest rates again at its next meeting, which could be a headwind for tech stocks. Insurance companies, on the other hand, can benefit.
Insurance companies generate a significant portion of their revenue through investing the premiums they collect. When interest rates rise, insurers can reinvest their funds at higher rates, leading to increased investment income and profits.
After collecting premiums from policyholders, insurance companies invest the portion of those funds that have not yet been paid out in claims, known as the float, into safe, short-term fixed income instruments. As interest rates rise, the value of these investments also rises, generating income for the insurance companies.
There is also growing demand for life insurance with an aging population becoming more concerned about protecting their financial assets.
The premiums they receive are typically paid for many years before a claim is even paid out on a relatively small number of actual claims.This gives insurance companies time to invest the premiums increasing their profits.
Insurance ETFs can be a good way to gain exposure to the insurance industry, which besides life insurance includes health insurance, property and casualty, as well as reinsurance. This broader exposure can smooth out the inherent risks of investing in any one particular company.
The SPDR S&P Insurance ETF (KIE) is one of the largest insurance ETFs in the sector. It holds an equal-weight of no more than 3% each of its 50 holdings.
Companies in KIE’s lineup include the following: Insurance Brokers, Life & Health Insurance, Multi-Line Insurance, Property & Casualty Insurance and Reinsurance.
Holdings include…
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