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investbetter

Insurance Stock ETFs For Higher Interest Rates

10 Year Treasury Rate Chart The best risk-adjusted ETF Without question, ETFs that hold more life and financial insurers than P&C companies will see the biggest benefit from rising rates because the long-end of the curve is expected to rise faster than the short-end of the yield curve. Bernanke's tapering would have a direct effect on long-dated U.S. Treasury and mortgage backed securities, not short-term T-bills or corporate credit. Does that make life insurers and financial insurers a better bet? Not necessarily. Insurers who write long contracts are very often a blackbox of complicated risks. When you insure long-term risks (such as mortality) or issue financial derivatives (such as interest rate swaps or contracts on the future value of the S&P 500) the risks are not easy to understand. Black Swans threaten forward earnings and solvency. There is no such thing as a Black Swan event for a geographically-diversified property and casualty insurance company. Said another way, actuaries can project with much better certainty the financial damage a legion of 16-year-old male drivers will create over the next 5 years than what the S&P 500 will be on a certain date 5 years into the future. Though it lags the two other insurance ETFs this year because of its exposure to short-end rates, it offers greater certainty than broad insurance ETFs. Top holdings like Chubb ( CB ) and Travelers ( TRV ) are well-regarded for their exceptional underwriting. Quarterly rebalancing keeps the fund in check, routinely slashing winners to go deeper in temporary underperformers. The fund's holdings trade at a very reasonable 1.07 times book value while throwing off irregular, but market-matching dividends of roughly 2% per year. Dividend growth is to be expected, since P&C companies do not need retained earnings to grow.
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