Insurers took a big hit during the Great Recession, with stocks tumbling
dramatically. For example,
Manulife Financial Corp. (TSX: MFC) was trading at about $42 in Toronto in the fall of 2008. It plunged all the
way to $12.90 per share in February 2009 after the company slashed its
dividend. That’s a loss of almost 70% for what until then was viewed as a
blue-chip stock with limited downside. Today the stock is still way below
its 2008 high, although it is now nearly 100% above its low back in 2009.
Sun Life Financial (TSX: SLF) had a similar but less gut-wrenching experience. It dropped from a peak of
$55.71 in December 2007 to $18.33 in December 2011, a loss of 67%. But
unlike Manulife, Sun Life did not cut its dividend, and the stock has
rebounded well in the past few years. It is now trading at close to the
2007 high of around $54.00, although it has taken more than a decade to get
back to that level.
Life insurance companies as a group are heavily leveraged to interest
rates. The higher they go, the better it is, because the bond holdings that
underpin their invested assets generate better returns. In most cases, the
bulk of an insurer’s portfolio is in low-volatility government bonds or
investment-grade corporate issues.
Rising rates also indicate a growing economy, which is good news for the
wealth management arm of an insurer’s business.
We have one insurance company on the Recommended List of my Income Investor newsletter, Sun Life. It was originally
recommended back in February 2007 at $47.95. As I have noted, it fell
dramatically from there, but we were able to collect a healthy dividend
while we waited for it to recover.
Now, with rates clearly on an upward trend that is likely to accelerate if
the economy remains strong, it’s time to add to our life insurance
exposure. Here is my choice:
First Asset U.S. & Canada Lifeco Income ETF (TSX: FLI)
Type: Exchange-traded fund
$0.67 (trailing 12 months)
The security: This ETF offers an equally-weighted portfolio of the 10 largest U.S. and
Canadian life insurance companies. The managers also write covered call
options on a portion of the portfolio to generate extra income.
Why I like it: These are good times for insurance companies, so the upside potential
here is positive. Equally important, the ETF provides good cash flow in the
form of quarterly distributions.
Performance: The fund has gained a modest 2.4% in the 12 months ended March 29.
However, it has a 4-year average annual compounded rate of return of
averaged 10% to the end of March.
The fund was launched in August 2013 and now has over $200 million in
assets under management. The management fee is 0.75%, which is on the high
side for an ETF. Most of the fund is invested in U.S. stocks like MetLife
and Prudential. Apart from Sun Life and Manulife, the only other Canadian
entry is Great West Life.
Risks: As we saw in the 2008-09 crash, insurance stocks can be at risk if the
economy sinks into recession and interest rates decline quickly.
Distribution policy: In 2017, the fund paid quarterly cash distributions of $0.169 per unit.
Tax implications: The tax breakout for 2017 included $1.10848 capital gains and $0.00719 in
return of capital, in line with what the ETF distributed in previous years.
Who it’s for: This is a fund for investors who are willing to incur moderate risk in
exchange for good cash flow and capital gains potential.
How to buy: The units trade actively on the TSX, so you should have no trouble
getting a fill.
Summing up: This is a good time to bulk up your insurance exposure. This fund is the
easiest way to do it. Talk to your financial advisor.
Gordon Pape is one of Canada’s best-known personal finance commentators and
investment experts. He is the publisher of
The Internet Wealth Builder and The Income Investornewsletters, which are available through the Building Wealth website.
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Notes and Disclaimer
© 2018 by The Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned carry risk of loss, and no guarantee of
performance is made or implied. This information is not intended to provide
specific personalized advice including, without limitation, investment,
financial, legal, accounting, or tax advice. Always seek advice from your
own financial advisor before making investment decisions.
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