Average LifeCo Return: Top 10 largest North American life insurance companies, as measured by market capitalization, as of October 31, 2021, have been used for calculation purposes.
Canada: Great West Life, Manulife and Sun Life.
U.S.: Lincoln National, Principal Financial, MetLife, Globe Life, Unum Group, Prudential Financial and Aflac.
Source: Morningstar Direct and Bank of Canada, as of October 31, 2021
Affordability compared to the banks
When most Canadians think of sound and reliable stocks, they immediately look to the banks. But the popularity of bank stocks for their stable returns also makes them more expensive on a relative basis. Over the last five years, insurers have looked increasingly more attractive next to Canadian banks, which currently trade at a 38% premium over FLI.
Plus, higher interest rates can have a positive impact on both banks and life insurance companies. This presents a unique opportunity for investors to benefit from rising interest rates through exposure to a discounted insurance sector instead of the big banks.
Higher yields and income potential
FLI is made up of an equally weighted portfolio of the 10 largest Canadian and U.S. life insurers for exposure to companies with strong market shares and yield potential. So far in 2021, the life insurance sector has outperformed the broader equity market while trading at near historic lows. In the third quarter of 2021, the sector was trading at a 62% discount to the S&P 500 Index, a 47% discount to the financials sector and a 13% discount to its own 5-year average.
FLI also has the added benefit of using a covered call strategy which can provide smoother risk-adjusted returns. As part of our covered call strategy, a call option is written on up to 25% of the portfolio to generate income and help reduce volatility. Meanwhile, the remaining 75% is exposed to upside growth potential for enhanced yield versus the fund’s benchmark.
Reasons to invest
After decades of declining interest rates, fears of the inevitable rise has become top of mind for many investors. Through income generation, attractive valuations and improving growth potential, exposure to life insurance companies through FLI could be an effective way for investors to benefit from rising interest rates.