Americans Pass on Life Insurance, Bad for ETFs

ETF Trends

In the financials space, investors are finding that insurance companies and related exchange traded funds provide less of a safeguard as more Americans forgo life insurance all together.

Industrywide sales of individual life insurance plans are down 45% since the mid-1980s, and about 30% of American households do not have life insurance at all, up 19% over the past 30-years, reports Leslie Scism for the Wall Street Journal. MetLife (MET) has revealed that premiums on policies sold to individuals last year was $409 million, a 26% fall from $553 in 2005, and

“As an industry…we need to change these [sales] trends,” said Mark Hug, an executive vice president in Prudential Financial Inc. (PRU), said in the article.

So far this year, insurance-related ETFs have been underperforming the broader market. For instance, the SPDR KBW Insurance ETF (KIE) is down 0.9%, iShares US Insurance ETF (IAK) is down 0.9% and PowerShares KBW Insurance Portfolio (KBWI) is 1.6% lower year-to-date. In comparison, the S&P 500 Financials Sector Index is up 4.7% year-to-date.

KIE includes a 24.9% weight toward the life insurance sub-sector, with a 2.1% position in MET and 2.1% in PRU. IAK allocates 37.0% toward life insurers, with a 11.0% weight in MET and 7.3% in PRU. KBWI includes MET 7.3% and PRU 6.3%.

Traditional life insurance companies are losing ground to mutual funds and 401(k)s as Americans turned to the markets to accumulate enough money for retirement.

Insurance companies themselves are also partly to blame for the steady decline in policies. In a bid to streamline their businesses, insurers diminished the number of in-house agents to save on recruitment, training and other costs. Meanwhile, the companies farmed out sales to securities brokers and independent financial advisors.

Moreover, the insurance industry has been suffering under a low rate environment. Low rates depress returns on fixed-income assets that insurers use in their investment portfolios, a traditionally important source of profits, along with underwriting. Monetary policies have also increased competition in the industry. Specifically, reinsurers, which help insure insurers, are seeing premiums drop as income-hungry investors push down yields on debt securities like catastrophe bonds. [Insurance ETFs Languish in Low-Rate Environment]

SPDR KBW Insurance ETF

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KIE_ETF

For more information on the insurance sector, visit our insurance category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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