The PowerShares Property & Casualty Insurance Portfolio ETF: Rest Assured

| About: PowerShares KBW (KBWP)

Summary

A unique fund focusing only on Assurance and Insurance.

The fund has an excellent track record since inception.

Insurance is often required by law, thus underwriting revenue in this financial subsector.

Why do some companies append Assurance to their name and others Insurance? Do you know whether you have a Life Assurance policy or Life Insurance policy? There's a subtle difference, but a critical one. According to Investopedia, "... Assurance is the coverage of an event that is certain to happen..." whereas Insurance will protect you financially from something that might happen within a fixed span of time. A life insurance policy covers you for a specific period of time. The idea being that you might cash in during the life of the policy. On the other hand a life assurance policy has no set period and will cash in, eventually.

You might be surprised to learn that the concept of financial protection goes back at least to the Code of Hammurabi; about 1750 BCE. During classical antiquity, about a thousand years later, the practice of General Average became widespread. This required all parties shipping goods on the same boat, pay a shared premium. Centuries later, the city state shipping powers of Renaissance Italy were the innovators of insurance contracts. Each contract was individually written and likely required a bit of haggling. However, it was a cataclysm on land which led to the very first truly modern insurance company.

The Great Fire of London in 1666 destroyed 75% of the city. The architect Sir Christopher Wren insisted on the need for property insurance as 'a matter of urgency'. Sir Wren even included a location for an insurance office in the city's rebuilding plan and the economist Nicholas Barbon was assigned the task to manage it.

This paved the way for all types of coverage. For example, the first life coverage was offered by the Amicable Society for a Perpetual Assurance Office in 1706. Another type of insurance innovation appeared just over two centuries later, during the Great Depression. With fewer patients able to afford the cost, hospital beds went unused. Baylor University Hospital in Dallas came up with a plan to offer group health care to teachers for 50 cents per month subscription premium. The symbol used for the plan is still synonymous with health insurance today: a Blue Cross.

There's one last piece of the insurance puzzle outside of health, life or property. This comes under the general heading of Casualty Insurance. According to Investopedia:

... Casualty insurance is a broad category of coverage against loss of property, dam age or other liabilities. Casualty insurance includes vehicle insurance, liability insurance, theft insurance and elevator insurance...

In other words, just about anything else. With few exceptions, everyone has insurance for something. Much of it is required by law. One clever way to offset your insurance or assurance premiums is to invest in this industry. Along those lines, one of the best ways is through the Invesco PowerShares KBW Property & Casualty Insurance ETF (NASDAQ:KBWP).

The fund first listed in December of 2010 and as the chart demonstrates, has had very respectable gains over the past four and a half years. The fund has had consistent distributions, paying out $4.22228 over that period of time. The trailing twelve month yield is 1.48%; the payouts are noted in the chart below. The fund is not too far off its recent high of nearly $49.11 but as the chart demonstrates it's well in line with a steady five year upward trend.

The market liquidity is fair at best, having a three month daily average of just over 17,000 shares but more than adequate to establish an entry position. The fund's P/E is 13.08, well below the current S&P 500 average of about 19 and trades at about 1.26 times book. It's fair to say that the fund seems reasonably priced. Management fees of 0.35% are well below the industry average of 0.44% and is currently trading about $0.17 below its per share NAV of $48.37, as of June 15.

Performance

Year To Date

1 Years

3 Years

5 Years

From 12/2/2010

Inception

Fund Market Price

3.77%

16.28%

14.52%

16.20%

15.64%

Fund NAV

3.96%

16.32%

14.51%

16.18%

15.61%

KBW Nasdaq Property

& Casualty Index

4.09%

16.71%

14.92%

16.60%

16.03%

Data from Invesco

The fund tracks the KBW Nasdaq Property & Casualty Index. KBW refers to the investment banking firm, Keefe, Bruyette & Woods. [N.B.: It's important to recognize that the firm was severely impacted by the 9/11 attacks, taking the lives of 67 employees. The firm has since, recovered].

According to Nasdaq-OMX, the index:

... is a modified market capitalization weighted index. The value of the Index equals the aggregate value of the Index share weights... ...of each of the Index Securities multiplied by each such security's Last Sale Price, and divided by the divisor of the Index...

Source: PowerShares

There are only 24 holdings in the fund; hence, the fund may be viewed as a very large property and casualty insurance company of the broader Financial Sector. From that point of view, it is far less risky than trying to pick one or two insurance companies from the broader Financial Sector.

About 39.5% of the fund is invested in large cap companies averaging out to $23.3 billion of market cap. The average yield of the large caps is 2.35% with an average dividend of $0.59%. As a rough measure of dividend sustainability, the most recent average quarterly dividend when compare to its per share cash flow is just over 5%; i.e. on the average, quarterly dividends account for about 5% of per share cash flow.

$10 to $29 Billion Market Caps 39.46%

Total Weight

Market Cap (in USD Billions)

Yield

Dividend

Div/

Cash Flow

P/E

P/B

Institutional Interest

Travelers Cos (NYSE: TRV)

7.88%

$32.295

2.43%

$0.67

8.513%

10.38

1.34

83.57%

Chubb Ltd (NYSE: CB)

8.12%

$28.895

1.79%

$0.57

4.104%

14.65

1.77

83.09%

Allstate Corp (NYSE: ALL)

8.11%

$25.120

1.97%

$0.33

2.625%

16.44

1.35

77.88%

Progressive Corp (NYSE: PGR)

7.92%

$19.216

2.69%

$0.89

6.637%

15.75

2.54

82.16%

Cincinnati Financial (NASDAQ: CINF)

7.43%

$10.974

2.88%

$0.48

3.254%

16.01

1.63

64.57%

Averages

$23.300

2.35%

$0.59

5.027%

14.65

1.73

78.25%

Data from Reuters and Yahoo!

The largest holding is Allstate. Allstate offers the full insurance product spectrum: Auto, Home, Renters, Condo, Business, Roadside Assistance, Life Insurance/Assurance, Supplemental Health and also Investment Services. The smallest large cap is Cincinnati Financial. The company insures through four subsidiaries including the Cincinnati Casualty Company, Cincinnati Indemnity and Cincinnati Specialty Underwriters Insurance Company forming the core business. The fourth subsidiary is the Cincinnati Life Insurance Company.

$5 to $10 Billion Market Caps 28.08%

Total Weight

Market Cap

Yield

Dividend

Div/Cash Flow

P/E

P/B

Institutional Interest

XL Group PLC (NYSE: XL)

3.69%

$9.669

2.42%

$0.20

1.982%

8.21

0.84

93.98%

Arch Capital Group (NASDAQ: ACGL)

3.97%

$8.587

0.00%

$0.00

0.000%

17.32

1.44

92.06%

Everest Re Group (NYSE: RE)

3.74%

$7.695

2.53%

$1.15

4.172%

8.15

1.02

14.00%

WR Berkley (NYSE: WRB)

4.09%

$6.739

0.87%

$0.12

0.800%

14.06

1.47

73.20%

American Financial Group (NYSE: AFG)

4.05%

$6.159

1.58%

$0.28

2.028%

14.56

1.30

62.10%

Assurant Inc (NYSE: AIZ)

4.66%

$5.349

2.32%

$0.50

12.185%

18.46

1.19

97.80%

Axis Capital Holdings (NYSE: AXS)

3.88%

$5.043

2.58%

$0.35

3.535%

11.04

0.95

94.11%

Averages

$7.034

1.76%

$0.37

3.529%

13.11

1.17

75.32%

Data from Reuters and Yahoo!

The 'smaller' large cap group comprises 28.08% of the fund with an average yield of 1.76% and average dividend of $0.37 per share. The largest holding is XL Catlin Group. Early in 2015, XL Group acquired Catlin Group, thus the name change. It's important to note that insurance companies also use insurance to mitigate their exposure to their insured customers. This is what is meant by reinsurance and it's a method of reducing exposure to potential losses. XL is this type of insurer but also offers a wide range of retail and business products including the Property & Casualty, Agriculture, Construction, Marine, Energy and even Political Risk Insurance. As noted above, many large insurance companies operate through separately held companies and distribute specific products through these subsidiaries. Two good examples of this are CINF, mentioned in the large caps and in this mid-cap group, Axis Capital Holdings, which operates through Axis Reinsurance, Axis Insurance as well as Axis Accident & Health.

Up to this point 67.54% of the fund has an average market cap of $13.812 billion, average yield of 2.01% and average dividend of $0.46. In other words, the fund is tilted towards large cap holdings.

$3 to $5 Billion Market Caps 20.13%

Total Weight

Market Cap

Yield

Dividend

Div/Cash Flow

P/E

P/B

Institutional Interest

RenaissanceRe Holdings (NYSE: RNR)

3.80%

$4.837

1.10%

$0.31

3.249%

13.45

1.11

98.33%

AmTrust Financial Services (NASDAQ: AFSI)

3.74%

$4.463

2.36%

$0.15

1.820%

9.09

1.85

45.62%

Endurance Specialty Holdings (NYSE: ENH)

3.64%

$4.384

2.34%

$0.38

3.240%

12.28

0.90

92.22%

Validus Holdings (NYSE: VR)

3.23%

$3.981

2.97%

$0.35

16.970%

11.02

1.20

99.43%

Hanover Insurance (NYSE: THG)

3.03%

$3.636

2.17%

$0.46

4.863%

10.63

1.22

85.68%

Allied World Assurance (NYSE: AWH)

2.70%

$3.201

2.91%

$0.26

0.368%

99.06

0.91

93.66%

Averages

$4.084

2.31%

$0.32

5.085%

25.92

1.20

85.82%

Data from Reuters and Yahoo!

In the $3 to $5 billion market cap group is RenaissanceRe Holdings. Primarily a reinsurer RNR, goes out a bit on the risk curve by engaging in strategic joint ventures as well as 'insurance-linked assets' which are described as "privately placed fixed income securities." These may be linked to catastrophic acts of nature which trigger losses in excess of a pre-determined threshold or possibly asset protection insurance.

One ubiquitous name and synonymous with insurance is, of course, Lloyd's of London. You might be surprised to learn that Lloyd's is not an insurance company but rather an insurance market. Specifically, Lloyd's is a market for companies to pool capital resources and thus diversify individual risk. Validus Holdings is one example of a Lloyds member 'underwriter'. Itoperates through four divisions: Validus Reinsurance, Talbot Holdings, Western World Insurance Group and AlphaCat Managers.

Being able to pool risks through Lloyd's allows smaller players to compete in the big leagues, so to say, and many smaller insurance companies participate in Lloyd's market for just that purpose. It's fair to say that the insurers in this range are the likely the future growth companies of this specialized industry.

$1.00 to $2.9 Billion Market Cap 12.33%

Total Weight

Market Cap

Yield

Dividend

Div/Cash Flow

P/E

P/B

Institutional Interest

Mercury General (NYSE: MCY)

2.39%

$2.872

4.77%

$0.62

2.102%

40.08

1.59

43.17%

Aspen Insurance Holdings (NYSE: AHL)

2.38%

$2.832

1.89%

$0.22

2.323%

10.73

0.80

97.78%

RLI Corp (NYSE: RLI)

2.35%

$2.824

1.24%

$0.20

5.724%

20.68

3.24

80.42%

ProAssurance (NYSE: PRA)

2.15%

$2.585

4.13%

$0.50

2.952%

23.03

1.31

82.62%

Selective Insurance Group (NASDAQ: SIGI)

1.71%

$2.050

1.69%

$0.15

1.636%

11.24

1.39

76.50%

Kemper Corp (NASDAQ: KMPR)

1.35%

$1.610

3.05%

$0.24

1.175%

25.36

0.79

55.20%

Averages

$2.462

2.80%

$0.32

2.652%

21.85

1.52

72.62%

Data from Reuters and Yahoo!

The smallest holdings have a market cap ranging from $1.610 billion to $2.872 billion; essentially small caps. They also tend to have smaller markets and focus on the retail consumer insurance market. Mercury General was formed in 1962 and is now California's leading insurance company. It focuses on its local niche market, providing retail auto and homeowner protection. The smallest cap in the fund is Kemper Corp, also focusing on the California market and providing insurance for higher risk drivers through its holdings, Kemper Specialty and recently acquired Alliance United. Like Mercury, Kemper's business model is to offer competitive low priced premiums to the higher risk retail market. Lastly, Kemper is diversified, offering insurance products for Health, Life and Business.

Summary

Market Cap

Yield

Dividend

Div/Cash Flow

P/E

P/B

Institution Interest

Averages

$3.524

2.50%

$0.32

3.846%

23.17

1.35

78.96%

Data from Reuters and Yahoo!

In total, the fund holdings have an average market cap of $3.524 billion, an average yield of 2.50% with an average dividend of $0.32, an average dividend to cash flow ratio of 3.846%, an average P/E of 23.17, an average share price multiple of 1.35 and are held by nearly 97% of investing institutions; very respectable numbers.

Although the methods of determining risk are mathematically sophisticated, it may all be described by the tongue-in-cheek Murphy's Law: if something can go wrong, it will go wrong. Merchants realized this at the very dawn of civilization. Insurers are betting that something won't happen whereas the insured are willing to sacrifice a bit of income to protect property, health or business. You've probably wondered about this yourself. Would you be willing to give up your home, auto, health or business insurance if you could? The very thought of the potential consequence would probably cause you to lose sleep!

This is just the point. Insurance is required by law or it's completely foolhardy to ignore it. Thus, the revenue stream is virtually underwritten by law or prudence. Just about everyone must figure insurance in their home budget. Now, if the insurance is never used that's something to be thankful for. However, in that case there's little return on your premiums aside from peace of mind. This is precisely the reason for having an insurance/assurance company fund in your portfolio. With a virtually guaranteed revenue stream it is more than likely to keep pace with the broader market and continue to pay distributions over the long term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CFDs, spread-betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.