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What's in Store for Insurance ETF (IAK) in Q1 Earnings?

Already 61.6% of the S&P 500 companies in the financial sector have reported Q1 earnings so far and the picture looks unimpressive. This is especially true as earnings are down 5% on 4.2% lower revenues with 64.6% beating EPS estimates and 56.3% surpassing on the top-line, as per the Zacks Earnings Trend (read: Earnings or Oil--What Will Drive Financial ETFs Ahead?).

Investors should note that bulk of the earnings releases from insurers is still to come, with many of them expected to report next week. Before diving into the earnings insights of the insurers, let’s take a look at its current industry fundamentals.

Industry Trends
 
While lower rates are dampening insurers’ return on their investment portfolios, which are the major sources of their income, increase in the value of bonds is acting as a catalyst to the 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 (read: Treasury ETFs in Focus on Flight to Safety).

Additionally, a slew of upbeat data from labor market, housing, and manufacturing point to a substantial improvement in economic growth that are leading to higher demand for all types of insurance services, giving a boost to insurance ETFs. In particular, iShares U.S. Insurance ETF (IAK) has been leading the industry over the past three months, gaining about 11.3%.

IAK in Focus

With AUM of $96.9 million, this product tracks the Dow Jones U.S. Select Insurance Index and holds 60 securities in its basket. Property and casualty insurance takes the top spot with 44% of the assets while life & health insurance and multi-line insurance also make up for a double-digit exposure each. Expense ratio is at 0.45% while volume is light.

The fund is highly concentrated on the top firm – American International (AIG) – at 11.5%, closely followed by Chubb Corp (CB) and MetLife (MET) that account for over 9% each. Additionally, Prudential Financial (PRU) also has a substantial exposure of 6.5% in the fund’s basket while other firms hold less than 6% share. Given their dominance in the fund’s portfolio, we have dug into the earnings picture of these four firms that could spring some surprises in the ETF performance (see: all the Financial ETFs here).
 
Inside Our Earnings Prediction
 
American International is slated to release earnings after the closing bell on May 2. The stock has seen negative earnings estimate revision of 25 cents over the past 90 days for the yet-to-be-reported quarter. Additionally, it delivered an average negative earnings surprise of 13.60% in the last four quarters. AIG has a Zacks Rank #3 (Hold) and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The stock has a solid Value Style Score of ‘B’ but its Growth Style Score of ‘F’ is miserable.

Chubb also has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult. The stock has seen negative earnings estimate revision of 10 cents over the past 90 days for the to-be-reported quarter. However, the leading property and casualty insurer delivered positive earnings surprises in the last four quarters, with an average beat of 2.41%. The stock has an unfavorable Value and Growth Style Score of C and D, respectively. The company is expected to report after the closing bell on May 4.

Similarly, earnings surprise prediction is also difficult for MetLife that has a Zacks Rank #3 and an Earnings ESP of 0.00%. It delivered average negative earnings surprises of 14.78% in the last four quarters. Further, the Zacks Consensus Estimate for first-quarter 2016 has been revised down from $1.43 to $1.40 over the past three months. While the stock has a superb Value Style Score of ‘A’, Growth Style Score of ‘F’ looks miserable (read: 3 Top-Ranked Large-cap Value ETFs for an Uncertain Market).

Unlike the other three, Prudential has a Zacks Rank #2 (Buy) and an Earnings ESP of +0.42%, indicating a higher chance of beating estimates this quarter. The company delivered positive earnings surprises in two of the last four quarters, with an average beat of 4.57% but saw negative earnings estimate revision of nine cents over the past three months for the to-be-reported quarter. The stock has a top Value Style Score of ‘A’ while Growth Style Score is unimpressive at ‘F’.

Summing Up

Given the lack of clarity about earnings surprises, it’s difficult to predict how will the insurance ETF perform in the coming days. Investors should note that IAK has a Zacks Rank #3 with a Medium risk outlook, suggesting that it is expected to perform in line with the broad market.

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ISHARS-US INSUR (IAK): ETF Research Reports
 
METLIFE INC (MET): Free Stock Analysis Report
 
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
 
CHUBB LTD (CB): Free Stock Analysis Report
 
AMER INTL GRP (AIG): Free Stock Analysis Report
 
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