Insuring Stocks as Portfolio Insurance

DDespite the efforts of characters like Flo and Jake to succeed, most people in America see the insurance industry as boring. This is probably because “boring” describes the business, by design. Insurance, at its core, is about protection and risk reduction. For consumers, those things are things you buy because you feel you have to, not because you need them. What they do is important; Insurance provides stability in our lives, but stability is far from adulterers. Perhaps this is why insurance policies are often overlooked in the sector, although there are times, like the present, when they are appropriate to the circumstances and a strong case can be made for everyone to have others.

Yesterday, I wrote that the evidence in some of the markets I rely on, bonds, forex, and stocks, pointed to an increase in stock prices in the face of economic weakness, if not an actual recession. The bottom line was that the bull run we’ve seen in the past few months isn’t going to end and another low may be on the way. This may indicate a defensive strategy for investors, and insurance stocks are a defensive play that is well-suited to current and future trends.

These two characteristics, safety and the adequacy of the expensive property, are both the products of the boring insurance. Insurance companies take money in the form of premiums, which they invest in. However, they need to ensure that they can always pay back any debts that may arise from the products, so that they do not take too much risk. In corporate investing, this means holding large amounts of US Treasuries and high-quality corporate bonds, and it fits where we are right now.

The yields on those bonds are rising, although not linearly, so the income of the insurance companies is rising. Their debts, according to actuarial risks, are not. You might think it’s like the costs of replacing things like cars and homes are going up, but, as anyone who’s ever gotten a car for any reason can tell you, things are usually insured for a fixed amount, not for anything that’s replaced. it can destroy. As replacement costs rise for new programs, so do premiums, covering the difference.

Insurance companies are protected from inflation and benefit from the increase in the amount of money the Fed is using to solve it. If that doesn’t make them a good buyer to justify the drop, I don’t know what does. The next question for investors is how to play.

As it happens when a certain sector or industry is favored by the conditions, there are two ways to do it. You can take a broader approach and buy an ETF, or you can buy individual stocks. Whether it works here, but, because the objectives are boring and safe, I would prefer to eliminate any single market risk and buy an ETF.

Notable ETFs for this activity are the SPDR Insurance Fund (KIE) and the iShares version (IAK). They closely follow each other in terms of performance, historical performance, and have similar fees at 0.35% and 0.39% respectively. If forced to choose, I’d prefer IAK because it’s heavily skewed towards property and casualty businesses that fit the above, supported by recent trends.

As you can see in the comparison chart above, IAK (the large, hilly chart) has outperformed KIE (the green line) over the past year. This is in line with the logic of the argument, as it turns out that most of the ineffectiveness has happened in the last six months, since the price increase has moved from theory to reality and the consequences began to be felt. The Fed has told us that they will continue to do so until data shows inflation at or near their 2% PCE level and that is far from over.

In other words, the most important thing to note from this chart is that the total fund for the insurance industry has significantly outperformed the S&P 500 ETF (SPY), identified by the blue line. It is clear that the continuation of insurance funds will continue for some time and, based on the success and certainty of success with KIE, that makes IAK a logical choice for investors who want to insure their portfolios if things turn around again.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.