While first quarter US GDP rose only fractionally, Standard & Poor's Global Economics believes growth will accelerate the remaining quarters of 2015. S&P Capital IQ believes this and continued gains in the labor and housing markets will help the insurance industry generate mid-single-digit revenue growth this year.
S&P Capital IQ equity analyst Cathy Seifert forecasts earned premium growth of approximately 4% to 5% in 2015. Seifert notes in a recently published Industry Survey that life insurers typically have both premium and fee income, reflecting a shift in their product offerings to more fee-based products like mutual funds and variable annuities.
Meanwhile, Seifert thinks a persistently low interest-rate environment has compressed margins in a number of areas, most notably the life insurance industry. Many life insurers have sought to re-price policies and reduce certain writings to counter the negative impact from lower rates. For some insurance companies, a "back to basics" product mix, with an emphasis on mortality based products, has been the solution. One such company is Principal Financial Group (PFG) that had reported total assets under management of $530 billion at March 31, 2015, up from $519 billion at the end of 2014. Seifert, who has a Buy recommendation on PFG shares, thinks results in the Retirement and Investor Services segment are likely to show significant improvement over the course of and 2015 and 2016. PFG offers a wide range of mutual funds across various investment styles, sub-advised by a number of well-known asset managers such as BlackRock, Goldman Sachs and T Rowe Price.
iShares US Insurance (IAK) and SPDR S&P Insurance (KIE) are the most direct ways to gain exposure to the insurance industry, but there are notable differences between them beyond the 10 basis point difference in the expense ratios.
IAK is a market-cap weighted ETF with top-10 holdings comprising 59% of assets. AIG and TRV are two of the six such companies that have a Buy recommendation from S&P Capital IQ. The ETF has $126 million in assets and shares trade on average 15,000 shares on a daily basis. Property & casualty companies made up 42% of assets as of the end of the first quarter, while life & health and insurance brokerage companies were 31% and 2%, respectively.
KIE is the larger ($295 million in assets), lower cost (0.35% expense ratio) and more actively traded (62,000 shares) insurance ETF. The SPDR ETF is an equally weighted ETF with just 21% of assets tied to top-10 holdings. TRV and insurance broker Brown & Brown (BRO 32 ****) are two such holdings. From a sub-industry perspective, there's less exposure to both property & casualty (37% of assets) and life insurance (24%) and more exposure to reinsurance (14%) and insurance brokers (10%).