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Insurance ETFs
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About Insurance ETFs |
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Insurance ETFs Overview and forecast
The insurance sector is traditionally a strong, if unglamorous performer on the world's stock markets. That situation changed with the meltdown and the AIG, Fannie Mae and Freddie Mac bailout debacles. The industry ETFs hit deep troughs in January 2008 and January 2009, and they've been slowly recovering since the current trough.
The insurance sector has been on the receiving end of both consumer and business downturns. As cashflow has been rationalized and reshuffled, they've been getting shrinkage across the board. Some insurance ETFs have had 50% plus shrinkage in their returns. The industry ETF average is 44%, although some ETFs are doing noticeably better.
The industry, naturally, is also still getting hit with demand for payouts from clients in a time of declining or static revenue. Revenue requirements have been affecting insurance packages, too. Product demand is a double edged problem.
The insurance ETFs are basically following the market, in terms of prices. The recovery in value has been on a rough par with the Dow. That's some reassurance, because insurance ETFs, inevitably, to follow any index or grouping, contain big name companies whose market sensitivity is very high.
However, that doesn't make prediction at all easy, in terms of future returns. The insurance sector, without the meltdown, was already having issues with premiums and basic business issues. The rise in unemployment and reduction in disposable income has had a near instant, direct impact on the insurance industry. Household, medical, and business insurance have all been affected.
Short term (2 months)
At this point, April 2009, it's hard to see the insurance industry making big progress beyond the market average. The insurance ETFs have been consistently following the markets. Interestingly, the ETF trading volumes have recently been showing signs of enthusiastic margin trading, so as short term investments, they're performing well from the lower price ranges in trader terms.
In terms of an upswing in the business, the insurance industry, however, is going to have to wait for a recovery for stabilization and the return of growth in a meaningful sense. The cashflow factor is important to the sector, in the form of its ability to adequately meet demand from the markets. The Catch 22 here is that money makes money, and cash has to move back into the sector for real performance. The industry is still in Damage Control mode.
Medium term (2 years)
There's a good reason for taking a mid to long term view of the insurance industry. It's still unclear to what extent exposure to toxic assets and derivatives is affecting the insurers. The basic caution of market investment in the financials is understandable, but it has obvious ramifications for prices and returns on investment.
Realistically, two years is enough to achieve a return to the upside for the insurance ETFs. If you've got the patience, remember the insurance ETFs are portfolio staples, and their value is a strong component of the financial and market indices in healthier times.
Long term (5 years)
It would be predictable that the industry would simply follow an economic recovery, but insurance is a complex business, multi layered. Retail and traditional insurance may pick up according to the recovery script, but more advanced insurance products may be strongly affected by both the changes in the economy and regulation.
The likely result of regulation may be to reinforce the industry, and protect it from the elements which undermined it during the meltdown. However, the investment market is also likely to be cynical about regulation, and proof in dollar and performance terms is more likely to persuade investors.
Qualifiers to projections
The meltdown has changed the insurance sector, both literally and conceptually. It's quite likely that the sector will see some significant restructuring as the big shakeout across the global insurance spectrum, which has even affected Lloyds, reshapes the corporate landscape.
Takeovers, mergers, and realignments are more than likely in a revived global insurance industry, and that will directly affect the insurance ETFs. It could also generate a lot of trading, and position plays within corporations which are components of the ETFs.
Because of this obvious paradigm movement, investment in insurance will have to be done with at least one eye open to opportunities as well as risks.
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Last Updated on: 2010-01-14 02:03:40 |
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