Insurance Runs

Insurance stocks have been steady all of this year and are well-positioned for the immediate future. The SPDR S&P Insurance ETF (NYSE Arca: KIE) is up over 18% year-over-year and has recently hit a record high since its debut 12 years ago.

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KIE tracks the S&P Insurance Select Industry with 50 stocks from the Insurance Brokers, Life & Health, Multi-Line, Property & Casualty, and Reinsurance industries, and reflects approximately $890 million in assets under management. The weighted average market value of KIE’s roster is approximately $16.6 billion. The ETF’s price-to-earnings ratio of 14 implies a significant discount to the overall market.

Zack’s Investment Research reports that the insurance industry generally had a good recent earnings season, measured against Zack’s estimates. Notable outperformers included the following bellwethers.

  • MetLife reported robust earnings of $1.30 per share, beating estimates of $1.28 and improved 57% from the year-ago quarter. Revenues increased 3% year-over-year to $17.6 billion and were well ahead of Zack’s estimate of $17.1 billion.
  • Prudential Financial, the second largest life insurer in the U.S., saw revenues increasing 10.2% year-over-year to $13 billion and earnings improving 13.6% over the same period.
  • Property and casualty insurers, Chubb, reported earnings per share of $2.50, outpacing estimates by a penny and improving 11% from the year-ago quarter. Revenues of $8.1 billion handily beat estimates of $7.5 billion.
  • AIG, the largest commercial insurer in the U.S. and Canada, beat Zack’s earnings estimate by 27.5%.

A Favorable Climate for Insurance Companies

Mountains of capital are required to achieve and maintain competitive claims pay rating. Because of this, the earnings of many insurance companies are determined as much or more by their enormous fixed-income portfolios as they are by their claims-to-premiums ratios.
The current state of the fixed-income market is conducive to insurance company health for several reasons.

  • Inflation is benign and no threat to erode fixed-income values
  • The slope of the yield curve is sensible and uncomplicated, helping bond liquidity
  • Interest rates may rise, but not so precipitously that the decline in the price of existing bonds cannot be readily hedged and offset by the purchase of higher yielding new issues, and
  • Bond defaults should remain in line with bond ratings, with few credit risk surprises.

Also, economic growth means more customers willing and able to pay insurance premiums and fewer incidents of dubious, aggressive or outright fraudulent claims.

Finally, for better or for worse, Congress seems institutionally unable to address health insurance reform. The removal of this uncertainty and potential negative headline risk is beneficial to the outlook for insurance stocks.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.