Financials Tax Puts Insurance ETFs In Focus

by on January 19, 2010 | ETFs Mentioned:

When the Obama administration unveiled last week its proposed Financial Crisis Responsibility tax, it appeared that the primary targets would be large banking institutions that had accepted billions of dollars in federal bailout funds last year. But a closer look at the proposal indicates that a handful of large insurance companies, many of whom did not take government aid to stay afloat during the downturn, could also be impacted.

The timing of the proposal has made it politically popular. Many institutions that were in danger of becoming insolvent during the financial crisis have staged impressive recoveries, and many are expected to report record earnings and pay out bonuses that rival pre-crisis levels. The hefty payday for bankers has added fuel to the “Wall Street vs. Main Street” fire, sparking public outrage and now spurring action from Washington. The “bank tax” has been promoted as a means of recouping the costs paid by American taxpayers to bail out troubled financial institutions over the previous two years.

Although the list of insurance companies that could be impacted includes firms that were at the center of the bailout controversy — American International Group, Hartford Financial, and Lincoln National could be hit with the tax — the potential payers also include a number of companies that turned down government funds. According to analyst reports Allstate, Ameriprise, MetLife, and Principal Financial Group could all owe up to $100 million. The proposed tax would be equal to 0.15% of total assets less high-quality capital. Insurance policy reserves, which are already subject to federal fees, would be untaxed.

Insurance ETF Options

Insurance companies and analysts are still scrambling to digest the latest proposal and determine the impact on the insurance sector, as many elements of the tax plan require further clarification. While the ultimate outcome could have a major impact on diversified financial ETFs, it could also affect those funds that specifically target insurance companies:

  • SPDR KBW Insurance ETF (KIE): This ETF tracks the KBW Insurance Index, a benchmark comprised of the leading companies active in the U.S. insurance industry, including several companies that may owe money under the proposed tax. KIE has about 25 individual holdings, and a forward price-to-earnings ratio of under 11.


  • iShares Dow Jones U.S. Insurance Index Fund (IAK): This fund offers considerably more depth of holdings compared to KIE, investing in stocks of about 60 U.S. insurance companies. Property and casualty (46%) and life insurance (41%) firms account for the majority of IAK’s exposure. This ETF has an expense ratio of 0.48%, and is up more than 30% over the last year.


  • PowerShares Dynamic Insurance Portfolio (PIC): This ETF is linked to one of PowerShares intelligent “Intellidexes,” a benchmark that evaluates potential component stocks (i.e., insurance companies) on a variety of investment merit criteria, including fundamental growth, stock valuation, and investment timeliness (see this feature for a closer look at enhanced indexing strategies). PIC has about 30 holdings and charges an expense ratio of 0.60%.


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Disclosure: No positions at time of writing.