Premium Power For Insurance ETFs

Entering 2016, it was not hard finding members of the investment community that were bullish on financial services stocks on the basis that the Federal Reserve was expected to raise interest rates at least four times.

Well, the Fed clearly has other ideas because more than three months into the year, no rate hikes have followed the one in December and it is looking like two boosts to borrowing will be the maximum this year, not the previously expected four. So it probably isn't surprising the financial services sector, the second-biggest sector weight in the S&P 500, is the second-worst performing group year-to-date behind healthcare.

Industry exchange traded funds tracking corners of the financial services universe that were expected to rise in unison with interest rates have been especially poor performers. Just look at the SPDR S&P Regional Banking ETF KRE, which is down nearly 10 percent year-to-date. Insurance stocks and ETFs are in the category of names positively correlated to rising interest rates, so it is credit to the fund's strength that the SPDR S&P Insurance ETF KIE is off just 0.6 percent year-to-date.

Insurance providers represent about 17 percent of the Financial Select Sector SPDR XLF, the largest financial services ETF by assets. Premium growth is helping insurance stocks and ETFs like KIE remain steady relative to the rest of the sector.

“Life insurers in the U.S. combined to post 4.5% growth in direct written premiums in 2015, compared to 2.4% in 2014. The industry had a compound annual growth rate of 2.7% from 2011 to 2015. The figures are based on an analysis by S&P Global Market Intelligence of total direct premiums written data, which includes first year, single and renewal premiums of U.S. life insurers for the year ended Dec. 31, 2015,” said S&P Capital IQ in a note out Monday.

KIE, home to nearly $472 million in assets under management, allocates 41 percent of its weight to property and casualty insurers with another 23.1 percent going to life and health insurance providers. KIE holds 49 stocks on an equal-weight basis, so none of its holdings command weights north of 2.42 percent.

Among financial services ETFs, the go-to rising rates plays are regional bank funds, but insurance ETFs deserve some credit for being positively correlated to rising Treasury yields. Simply put, steeper yield curves are advantageous for insurance providers.

“MetLife Inc. MET, which has the top U.S. life insurance market share spot in 2015 had an acceleration of growth in 2015, growing 7.8% in 2015, up from 0.5% in 2014. Direct premiums written with its U.S. businesses exceeded premium levels of 2011 for the first time in four years and 57% of total policies written by the insurer in 2015 were in group life insurance,” said S&P Capital IQ.

MetLife, which recently won a court case against the U.S. government for the removal of the company's too big to fail tag, is nearly 2.3 percent of KIE's weight.

Disclosure: The author owns shares of XLF.