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Insurance ETFs Well Poised on Decent Q1 Earnings

Even amid a sluggish backdrop, the insurance corner of the financial sector is performing remarkably well. While lower rates are dampening insurers’ returns on their investment portfolio, which is the major source of their income, an increase in the value of bonds is acting as a catalyst to insurance companies.

This is because most insurers’ hold a significant amount of longer-dated bonds, which are rising with less chance of an interest rates hike anytime soon. Additionally, an improving labor market, housing recovery, and stabilization in manufacturing activities point to a substantial improvement in economic growth, which would lead to higher demand for all types of insurance services. This would in turn give a boost to insurance ETFs (read: Manufacturing Churns Out Slow Growth in US--ETFs in Focus).

Further, earnings from the insurance industry have been strong with most players managing to beat either our earnings or revenue estimates. Chubb Corp (CB) surpassed our earnings estimates while Travelers (TRV) topped revenues. Aflac Inc. (AFL) and Allstate (ALL) surpassed our estimates for both the top and the bottom line while MetLife (MET) and American International (AIG) missed on both.

Insurance Earnings in Focus

Earnings at one of the leading property and casualty insurer – Chubb – outpaced our estimate by 7 cents and were a penny higher than the year-ago quarter. However, revenues of $7.24 billion missed the Zacks Consensus Estimate of $7.71 billion. Another property and casualty insurer and an industry bellwether, Allstate, topped the Zacks Consensus Estimate by 9 cents with earnings of 84 cents per share, which tumbled 42.5% from the year-ago quarter. Revenues increased 2.3% year over year to $9 billion and edged past the Zacks Consensus Estimate of $8.04 billion.

Aflac, the seller of supplement health insurance, posted earnings per share of $1.73, beating our estimate by 11 cents and improving 12.3% year over year. Revenues rose 4.3% year over year to $5.5 billion and were ahead of our estimate of $5.23 billion.

However, MetLife, the U.S. life insurer behemoth, reported disappointing earnings of $1.31 per share, which lagged the Zacks Consensus Estimate of $1.39 and declined 9% from the year-ago quarter. Revenues also fell 2.5% year over year to $16.61 billion and were well below our estimated $17.07 billion (see: all the Financial ETFs here).

The largest commercial insurer in the U.S. and Canada, AIG also lagged our earnings and revenue estimates. Earnings per share of 65 cents fell shy of the Zacks Consensus Estimate of 99 cents and declined 46.7% from the year-ago earnings. Revenues of $12.51 billion came below our estimated $12.69 billion.

Earnings of $2.57 per share reported by personal property and casualty insurer Travelers missed the Zacks Consensus Estimate by 24 cents and decreased 7.9% from the year-ago quarter. Revenues inched up 1% year over year to $6.7 billion and were ahead of our estimate of $6.6 billion.

ETFs in Focus

Given decent Q1 earnings, insurance ETFs – SPDR S&P Insurance ETF (KIE) and iShares U.S. Insurance ETF (IAK) – have lost less than the other corners of the financial space over the past 10 days. This is especially true as KIE and IAK are down 0.01% and 1.1%, respectively, as compared to the loss of 1.8% for the broad financial ETF (XLF) and 4.8% for the bank ETF (KBE).
 
Investors looking to gain exposure to the insurance corner of the market segment in a diversified way may consider the following ETFs. These funds have a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: What's in Store for Insurance ETF in Q1 Earnings?).

SPDR S&P Insurance ETF (KIE)

This fund follows the S&P Insurance Select Industry Index, holding 49 stocks in its basket. None of the securities holds more than 3.07% of total assets with AFL, ALL, AIG, TRV and MET accounting for over 2% share each. About two-fifths of the portfolio is allocated to the property and casualty insurance sector while life & health insurance accounts for one-fourth share. The ETF has managed $348.3 million in its asset base and trades in a moderate average daily volume of about 127,000 shares. The product has an expense ratio of 0.35%.

iShares U.S. Insurance ETF (IAK)

With AUM of $95.8 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 62 securities in its basket with double-digit allocation going to American International and Chubb each. The other in-focus four firms – MET, TRV, AFL and ALL – collectively make up for 24.8% of assets. Here also, property & casualty insurance accounts for the largest share at 45.1% while life & health insurance and multiline insurance round off the top three with double-digit exposure each.

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SPDR-KBW INSUR (KIE): ETF Research Reports
 
ISHARS-US INSUR (IAK): ETF Research Reports
 
CHUBB LTD (CB): Free Stock Analysis Report
 
TRAVELERS COS (TRV): Free Stock Analysis Report
 
AFLAC INC (AFL): Free Stock Analysis Report
 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
METLIFE INC (MET): Free Stock Analysis Report
 
AMER INTL GRP (AIG): Free Stock Analysis Report
 
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