Insurance isn't exactly an industry that gets investors' pulses racing. But it's turning into a profitable place to hide out while the rest of the S&P 500 sells off.
The iShares U.S. Insurance ETF is up 4.9% since the day the S&P 500 peaked this year on July 31. That might not sound like much of a return until you consider the SPDR S&P 500 ETF Trust is down 7.6% during that same time. Had you invested $10,000 into insurance stocks that day rather than the S&P 500, you'd have $1,220 more.
And yet, many investors are lightly exposed to the insurance industry, figuring they already own financials. But financials and insurance are not one and the same, says Todd Rosenbluth, head of research at Vetta Fi. "Insurance companies are outperforming the broader financial sector in 2023 and within the last three months."
Finding Profits In Insurance
Rising interest rates might hurt many industries in the S&P 500. But they're a boon for insurers.
Why? Most insurers collect cash premiums from policyholders. They're then able to invest that cash until claims are paid, including in Treasury securities. Rising rates on Treasuries increase the returns on this "float." Additionally, insurers tend to have relatively stable businesses that allow some of them to pay stable dividends.
And these reasons explain why insurers are standouts in the market now. Four of the top 10 stocks in the S&P 500 since July 31 are in the insurance industry group. And some of the performances are nothing short of stellar. Mayfield, Ohio-based Progressive has seen its shares rise more than 27% since late July, making it the No. 2 best stock in the index in that time. The insurer's adjusted profit per share is seen jumping more than 40% this year.
It's closely followed by Atlanta-based Assurant, which offers consumer insurance products for everything from applications to manufactured housing. Its adjusted profit per share is expected to rise more than 30% this year.
Nonetheless, many S&P 500 investors don't own much insurance. Insurance companies are only an 18% weight in the Financial Select Sector SPDR ETF, and much of that's Berkshire Hathaway, Rosenbluth says. Insurance's exposure in the financial ETF is behind financial services, banks and capital markets at 34%, 23% and 22%, respectively. Giant financial companies like Bank of America, JPMorgan Chase, Mastercard and Visa crowd out the insurance exposure in the financial sector.
That means investors looking for more insurance exposure will need to bolt it on.
Finding Insurance ETFs
ETFs are an easy way to juice a portfolio's insurance exposure until rates fall.
The logical first candidate is the $376 million-in-assets iShares US Insurance. It holds shares of more than 50 insurers. And the ETF weights insurance stocks based on their market value. That means Progressive and Chubb were a combined 27% of assets in the ETF, Rosenbluth says. Meanwhile, American International Group, Aflac and MetLife each accounted for more than 5% of the portfolio. The ETF charges 0.4% annually.
Another approach is to weight all the insurance positions equally. That's what SPDR S&P Insurance ETF does. It holds roughly 2% to 3% positions in all 49 insurance stocks in its portfolio. It owns giants like Progressive, but also owns smaller companies like Arch Capital and Assurant in its top 10. SPDR S&P Insurance is up 1.4% since July 31, lagging iShares US Insurance. It charges 0.35% annually.
"Investors need to determine if they want a megacap or smaller-cap tilt to their industry exposure," Rosenbluth said. "With an equally weighted approach the risk and reward potential can be higher."
Insurance Stocks Thrive
They dominate top S&P 500 stocks since July 31
| Company | Ticker | Industry | Ch. |
|---|---|---|---|
| Arista Networks | Technology Hardware and Equipment | 35.9% | |
| Progressive | Insurance | 26.7% | |
| Assurant | Insurance | 23.8% | |
| Eli Lilly | Pharmaceuticals, Biotechnology and Life Sciences | 22.0% | |
| Constellation Energy | Utilities | 18.8% | |
| Cboe Global Markets | Financial Services | 18.6% | |
| Marathon Petroleum | Energy | 16.7% | |
| Arch Capital Group | Insurance | 15.8% | |
| NRG Energy | Utilities | 15.5% | |
| Allstate | Insurance | 15.1% |
