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Time for a little insurance in an era of rising rates
12/17/2018 3:22:57 AM
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Wealth Builder
Gordon Pape writes on common-sense wealth-building strategies.



By Gordon Pape  | Monday, April 09, 2018


 

BUILDING WEALTH WITH GORDON PAPE
 

Where does an income investor look when interest rates are on the rise? Try life insurance companies. Rising rates are usually bad news for interest-sensitive securities like utilities, telecoms, and REITs. But, like the banks, insurers fare much better when rates are on the rise. They not only offer the potential for capital gains but also respectable yields for the most part.

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
Trading symbol: FLI
Exchange: TSX
Recent price: $12.46
Annual payout: $0.67 (trailing 12 months)
Yield: 5.4%
Risk: Moderate risk
Website: www.firstasset.com

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.

Key metrics: 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.

For more information on subscriptions to Gordon Pape’s newsletters, check the Building Wealth website.

Follow Gordon Pape on Twitter at https://twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.

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.

BUILDING WEALTH WITH GORDON PAPE
 

 
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