Insurance companies are no strangers to natural disasters like hurricanes, thunderstorms, and wildfires. Surprisingly, these catastrophic events actually work in their favor. As the severity of these weather phenomena increases, insurers respond with higher rates and tighter coverage, ultimately boosting their profits.
Meyer Shields, an analyst at Keefe, Bruyette & Woods, explains that there is a common adage in the insurance industry: “bad news is good news.” This means that when things go wrong, insurers stand to benefit financially.
Now might be the time to consider adding property and casualty insurers to your investment portfolio. These carriers have managed to increase premium rates, leading to higher revenue that can be invested to cover future losses. Additionally, many insurance companies have chosen to withdraw from disaster-prone areas such as California and Florida, where they couldn’t charge adequate rates to generate profits.
Despite the potential for increased claims due to severe weather events, analysts believe that the industry as a whole is well-capitalized and capable of handling these challenges. Therefore, it presents an attractive opportunity for investors.
For those interested in gaining exposure to a wide range of property and casualty insurers without investing in individual companies, the Invesco KBW Property & Casualty Insurance ETF (KBWP) offers a suitable solution. With $151.6 million in assets, this exchange-traded fund provides pure-play exposure through its portfolio of 24 companies, including carriers and reinsurance companies that offer coverage to insurers. It encompasses both commercial and personal lines of insurance.
The KBWP ETF is passively managed, tracking the KBW Nasdaq Property & Casualty Index and rebalancing its holdings on a quarterly basis. Currently, its top five holdings are American International Group (AIG), Chubb, Progressive (PGR), Allstate (ALL), and Travelers (TRV).
Investing in property and casualty insurance companies could be a lucrative move, especially considering the current market conditions. With the ability to raise premium rates, withdraw from high-risk areas, and a solid capital base, these insurers are well-positioned to navigate the challenges of a changing climate. The Invesco KBW Property & Casualty Insurance ETF offers investors a convenient option for diversifying their portfolio within this sector.
Exploring a Niche Investment Opportunity
Ryan Jackson, a manager research analyst for passive strategies at Morningstar Research Services, sheds light on the potential of a specific corner in the market. Investors ought to establish realistic expectations for the performance of this investment opportunity.
Despite a 4% decrease in value this year, the ETF has garnered a five-star, bronze medalist rating from Morningstar. Since its inception in 2010, this fund has consistently outperformed its Morningstar financial services benchmark. Over the span of one, five, and ten years, it has delivered impressive total returns of 5.64%, 7.75%, and 11.19% respectively, securing its position in the top quartile.
Jackson highlights the reasonable expense ratio of 0.35% for this fund, which is typical for a sector industry ETF. He explains that niche strategies like this often come with slightly higher fees compared to more broadly diversified portfolios.
One aspect that Jackson appreciates about this fund is its tracking of a market capitalization weighted index of companies. This approach allows the market to determine the most valuable stocks within a highly efficient market like the U.S., where stock prices consistently reflect intrinsic value.
However, investors should be cautious due to the concentrated nature of this ETF, comprising only two dozen stocks. Thus, it is best seen as a complementary investment to a more diversified core allocation strategy.