Insurance ETFs Gaining On Decent Q2 Results

By Sweta Killa of Zacks.com

Thursday, August 6, 2015 1:46 PM EDT

Financials has been one of the best performing sectors in the Q2 earnings season but excluding finance, the overall growth picture for the broader market looks dull. Total earnings for 96.4% of the sector’s total market capitalization are up 8.6% on 0.9% revenue growth, with beat ratios of 67.9% and 64.2%, respectively.

Most of the sector’s growth came from the combination of lower litigation charges, better expense management, rising fees from surging M&A activity and growth in trading businesses. While big banks and investment brokerage firms no doubt posted robust Q2 results, earnings from the insurance industry have also been encouraging with most of the insurers beating the respective Zacks Consensus Estimate (read:Bullish Banking Earnings Drive Up These ETFs).

While Prudential Financial (PRU - Analyst Report) and Travelers (TRV - Analyst Report) surpassed our estimates on both the top and bottom lines, MetLife (MET - Analyst Report), American International (AIG - Analyst Report) and Chubb Corp (CB - Analyst Report) lagged on revenues. Nevertheless, Allstate (ALL - Analyst Report) and Aflac Inc. (AFL - Analyst Report) reported lackluster earnings.

Insurance Earnings in Focus

MetLife, the U.S. life insurer behemoth, beat the Zacks Consensus Estimate by 9 cents with earnings of $1.56, which improved 12% from the year-ago quarter. However, revenues slipped 2.5% year over year to $17.36 billion and fell shy of the Zacks Consensus Estimate of $17.7 billion. On the other hand, PRU, the second-largest U.S. life insurer, topped our earnings estimate by 18.3% to report $2.91, which is also higher than the year-ago earnings of $2.49 per share. Revenues also rose 12.5% to $12.5 billion, much above our estimate of $11.19 billion.

The largest commercial insurer in the U.S. and Canada, AIG posted impressive earnings of $1.39 per share, which surpassed the Zacks Consensus Estimate of $1.22 and increased 13% from the year-ago quarter. Revenues of $13.37 billion came in slightly below our estimate of $13.41 billion.

Earnings at one of the leading property and casualty insurer – Chubb – also beat our estimate by 11.2% and improved 22% from the year-ago quarter. However, revenues of $3.44 billion slightly missed the Zacks Consensus Estimate of $3.49 billion. On the other hand, earnings of $2.52 at personal property and casualty insurer, Travelers strongly outpaced the Zacks Consensus Estimate by 40 cents and improved 31% from the year-ago earnings. Revenues slid 1% year over year to $6.7 billion but surpassed our estimate of $6.6 billion (read: Insurance ETFs Jump as ACE Agrees to Buy Chubb).

Another property and casualty insurer and an industry bellwether, Allstate, posted disappointing earnings of 63 cents per share, lagging the Zacks Consensus Estimate of 94 cents and declining from the year-ago earnings of $1.01. However, revenues rose 1.4% year over year to $8.98 billion and were well ahead of our estimate of $7.88 billion.

Earnings at Aflac, the seller of supplement health insurance, also missed our estimate by a couple of cents and fell 9.6% year over year. Revenues declined 9.4% year over year to $5.29 billion and fell shy of our estimate of $5.34 billion.

ETFs in Focus

The spate of decent earnings has driven insurance ETFs higher over the past one-month period. Investors looking to gain exposure to this corner of the market segment in a diversified way may consider the following ETFs. Any of these could be an excellent choice given that each has a favorable Zacks Rank of 3 or ‘Hold’ rating.

Further, the Fed is on track to raise interest rates sometime later in the year given the strengthening of the U.S. economy. As the sector is a clear beneficiary of a rising interest rate environment, an increase in interest rates would propel insurance stocks and ETFs higher (read: 5 ETFs Strategies to Prepare for Higher Rates).

SPDR S&P Insurance ETF ((KIE - ETF report))

This fund follows the S&P Insurance Select Industry Index and offers an equal weight exposure to 52 stocks, suggesting no concentration risk. None of the securities holds more than 2.68% of total assets. More than one-third of the portfolio is allocated to the property and casualty insurance sector while life & health insurance accounts for another one-fourth share. The ETF has managed $525 million in its asset base and trades in a moderate average daily volume of over 76,000 shares. The product has an expense ratio of 0.35% and gained nearly 3.3% over the past one month.

iShares U.S. Insurance ETF ((IAK - ETF report))

With AUM of $138.8 million, this product tracks the Dow Jones U.S. Select Insurance Index and charges 45 bps in annual fees. Volume is light, trading in roughly 21,000 shares per day. In total, the fund holds 63 securities in its basket with the largest allocation going to American International at 14.0%, closely followed by Metlife at 10.2%. Other firms hold less than 6.7% of assets. IAK is up 2.7% from a one-month look (see: all the Financial ETFs here).

PowerShares KBW Insurance Fund ((KBWI - ETF report))

This fund tracks the KBW Insurance Index and holds 24 securities in its basket. Out of these, MET, PRU and TRV take the top three spots with nearly 8% share each. Other in-focus firms like CB, AFL and ALL make up for at least 3.5% of KBWI. The product has amassed about $14.8 million in AUM while volume is paltry at about 1,000 shares. The ETF charges an annual fee of 35 bps and added 2.5% in the trailing one-month period.

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