Insurance ETFs Benefiting From Decent Q4 Earnings

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Includes: IAK, KBE, KBWI, KIE, XLF
by: Zacks Funds

Though the financial sector has been on a rough ride this year, especially on plunging oil prices, global growth concerns and reduced likelihood of frequent interest rate hikes, Q4 earnings are faring well so far. Total earnings for 77.9% of the sector's total market capitalization are up 5.3% on 0.7% higher revenues. This is better than earnings growth of 3.6% and revenue decline of 1.3% for the group of the same companies reported in Q3.

As much as 66.2% of the companies beat earnings estimates and 60.8% beat on the top line compared with earnings and revenue beat ratios of 55.4% and 44.6%, respectively in Q3. In particular, earnings from the insurance industry have been strong with most players managing to beat either our earnings or revenue estimates. Earnings at Chubb Corp (NYSE:CB) surpassed our estimates while Prudential Financial (NYSE:PRU) and American International (NYSE:AIG) topped revenues.

Aflac Inc. (NYSE:AFL), Allstate (NYSE:ALL) and Travelers (NYSE:TRV) surpassed our estimates for both the top and the bottom lines while MetLife (NYSE:MET) missed on both (read: Buy the Dip in These Undervalued Sector ETFs & Stocks).

Insurance Earnings in Focus

Earnings at one of the leading property and casualty insurer - Chubb - outpaced our estimate by 4.39% but decreased 3.6% from the year-ago quarter. However, revenues of $4.73 billion missed the Zacks Consensus Estimate of $4.77 billion. Another property and casualty insurer and an industry bellwether, Allstate, topped the Zacks Consensus Estimate by 27 cents reporting earnings of $1.60, which declined 7% from the year-ago quarter. Revenues declined 0.8% year over year to $8.94 billion and edged past the Zacks Consensus Estimate of $8.01 billion.

Aflac, the seller of supplement health insurance, posted earnings per share of $1.56, beating our estimate by 8 cents and improving 20.9% year over year. Revenues declined 3.5% year over year to $5.32 billion but were ahead of our estimate of $5.24 billion. Earnings of $2.93 per share reported by personal property and casualty insurer Travelers trumped the Zacks Consensus Estimate by 19 cents but decreased 6% from the year-ago quarter. Revenues slid 2% year over year to $6.7 billion and were well ahead of our estimate of $6.63 billion.

However, MetLife, the U.S. life insurer behemoth, reported disappointing earnings of $1.23 per share, which lagged the Zacks Consensus Estimate of $1.36 and declined 11% from the year-ago quarter. Revenues also fell 6% year over year to $17.11 billion and were well below our estimated $17.45 billion. On the other hand, PRU, the second-largest U.S. life insurer, also missed our earnings estimate by a huge 33 cents and declined 8.5% year over year. Revenues plunged 16.3% year over year to $13.2 billion but surpassed our estimate of $11.6 billion.

The largest commercial insurer in the U.S. and Canada, AIG lagged the earnings estimate but beat on revenues. Loss per share of $1.10 is wider than the Zacks Consensus Estimate of a loss of 90 cents. In the year-ago quarter, the company had reported earnings of 97 cents per share. However, revenues of $13.49 billion came above our estimate of $12.84 billion.

ETFs in Focus

Given decent Q4 earnings, insurance ETFs have fared well, losing less than the other corners of the financial space from a one-month look. This is especially true as these funds lost in the range of 2.5-4% compared to the loss of 6.5% for the Financial Select Sector SPDR ETF (NYSEARCA:XLF) and 8% for the SPDR S&P Bank ETF (NYSEARCA:KBE).

Investors looking to gain exposure to the insurance corner of the market segment in a diversified way may consider the following ETFs.

SPDR S&P Insurance ETF (NYSEARCA:KIE)

This fund follows the S&P Insurance Select Industry Index and offers an equal weight exposure to 49 stocks, suggesting no concentration risk. None of the securities holds more than 2.61% 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 21.4% share. The ETF has managed $412.7 million in its asset base and trades in a moderate average daily volume of about 134,000 shares. The product has an expense ratio of 0.35% and lost nearly 2.5% over the past one month. It has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook.

iShares U.S. Insurance ETF (NYSEARCA:IAK)

With AUM of $97.3 million, this product tracks the Dow Jones U.S. Select Insurance Index and charges 44 bps in annual fees. Volume is light, trading in roughly 31,000 shares per day. In total, the fund holds 61 securities in its basket with the largest allocation going to American International at 12.1%, closely followed by Chubb at 10.4%. Other firms hold less than 7.8% of assets. From an industry look, property & casualty insurance accounts for 46.7% share while life & health insurance and multiline insurance round off the top three with double-digit exposure each. IAK is down 3.8% from a one-month look and has a Zacks ETF Rank of 3 with a Medium risk outlook.

PowerShares KBW Insurance Fund (NYSEARCA:KBWI)

This fund tracks the KBW Nasdaq Insurance Index and holds 24 securities in its basket. Each firm holds less than 8.8% share with TRV, AIG, MET, PRU and ALL being among the top 10 holdings. While insurance makes up for 96% of the portfolio, consumer finance and banks take the remainder. The product has amassed about $11.9 million in AUM while volume is paltry with about 1,000 shares exchanging hands a day. The ETF charges an annual fee of 35 bps and shed 3.5% in the trailing one-month period. It has a Zacks ETF Rank of 3 with a High risk outlook.

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