On Insurance Stock Indexes

I’m still toying with the idea of starting an insurance-only hedge fund.  I own a lot of insurers, and I think that I get the better of that market.

Where I have a harder time is with what to short. Shorting is tactical not structural, and I am less good at the tactical vs structural.  Having a tradable benchmark to short against would be useful, but what exists there?

There is one ETF focused on insurance that has any significant volume — KIE.  In the past, it was capitalization-weighted, but now it is equal-weighted.  That stems from a change in the index that the ETF follows, from one set by KBW to one set by S&P.

Personally, I don’t get the change, but here are my statistics on the change:

The “Old KBW” column comes from segmentation done by KBW.  The other columns are done by me.  There are some matters for judgment:

Do you include Berkshire Hathaway?  I think you should.  Do you include foreign life insurers traded on US exchanges?  I think you should.

I am also more willing to place a company in the “Conglomerate” category because of companies that are in multiple lines of insurance, without a dominant area of insurance that they are in, or, they have significant non-insurance ventures.

Anyway, the new KIE overstates the insurers in Bermuda and the Brokers.  It understates life insurers and conglomerates.

Aside from that, the new S&P index, being equal-weighted, is more mid-cap than a whole market index would be.  Also, if I put more effort into this, I would segment companies into their proportions, and there we be no conglomerates.

These may be trivial concerns to some, but if you are thinking of running a portfolio that might be shorting KIE against other insurance longs, it makes a considerable difference.

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About the Author

David Merkel
David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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