Similar to the first quarter, the financial sector has been a major drag on total Q2 earnings growth. This is especially true as financials stand out for weak growth numbers, trailing autos (read: Steer Clear of The Car ETF After Mixed Auto Stock Earnings).
However, earnings growth and beat ratios fared better than expected and improved from the last quarter. Total earnings for 97.5% of the sector’s total market capitalization are up 1.7% on 2.9% revenue growth. This is well above the last quarter decline of 7.9% in earnings and 1.2% in revenues. Further, the earnings beat ratio of 79.5% and revenue beat ratio of 73.1% also edged past 65.3% and 56% ratios, respectively, recorded in Q1.
These encouraging figures came amid an ultra-low interest rate environment, which is dragging the insurance space down. The sentiments have been broadly mixed in the insurance sector in Q2 earnings.
While some industry primes either beat or met our estimates on the revenue front, most of these lagged on the bottom line. These include MetLife (MET - Analyst Report) , Travelers (TRV - Analyst Report) and Chubb Corp (CB - Analyst Report) . Earnings from other popular names such as American International (AIG - Analyst Report) , Prudential Financial (PRU - Analyst Report) , Aflac Inc. (AFL - Analyst Report) and Allstate (ALL - Analyst Report) have been inspiring.
Insurance Earnings in Focus
MetLife, the U.S. life insurer behemoth, missed the Zacks Consensus Estimate by 2 cents and deteriorated 4 cents from the year-ago quarter. Revenue rose 5% year over year to $17.80 billion and beat the Zacks Consensus Estimate of $17.22 billion. On the other hand, PRU, the second-largest U.S. life insurer, surprised the market yet again with a strong earnings beat of 14 cents and 8.3% year-over-year improvement. Total revenue fell 5.2% to $11.1 billion but was in line with the Zacks Consensus Estimate.
Aflac, the seller of supplement health insurance, topped our earnings estimate by 7 cents and improved 2.5% from the year-ago earnings. However, revenues of $5.84 billion met our estimate and declined 3.4% year over year. The largest commercial insurer in the U.S. and Canada – AIG – reported strong earnings of $1.25, which breezed past the Zacks Consensus Estimate of $1.05 and was well above the year-ago earnings of $1.12. Revenues dropped 12.6% year over year to $16.11 billion, but easily crushed our estimate of $9.87 billion.
One of the largest property and casualty insurers and an industry bellwether, Travelers, posted disappointing earnings of $1.93 per share, missing the Zacks Consensus Estimate by 13 cents and deteriorating 9.4% from the year-ago earnings. However, revenues were strong at $6.71 billion, up 2% from the year-ago quarter and above the Zacks Consensus Estimate of $6.53 billion (read: Regulatory Letdown? Not for These 3 Insurance ETFs).
Earnings at another property and casualty insurer – Chubb – also missed our estimate by a huge difference of 20 cent per share and declined 4% from the year-ago earnings. Revenues of $3.54 billion nevertheless topped the Zacks Consensus Estimate of $3.41 billion and were flat year over year.
Earnings at Allstate, personal property and casualty insurer, outpaced the Zacks Consensus Estimate by 26.3%, but fell 9.8% year over year. Revenues rose 0.8% year over year to $8.86 billion and were well ahead of our estimate of $7.59 billion.
Insurance ETFs: Worth a Look
Despite higher Q2 growth, earnings failed to impress insurance ETFs, pushing them down over the past one month. The beaten down prices could be a solid entry point for investors seeking higher returns, especially if interest rates go up. This is because the U.S. economy strongly rebounded at 4% in Q2 from the worst decline since the last recession ended five years ago that boosted the case for a sooner-than-expected interest rates hike.
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 the products have either a Zacks Rank of 1 or ‘Strong Buy’ rating or Zacks Rank of 2 or ‘Buy’ rating with a Medium risk outlook (see: all the Financial ETFs here).
SPDR S&P Insurance ETF ((KIE - ETF report) )
This fund follows the S&P Insurance Select Industry Index and offers an equal weight exposure across 51 stocks, suggesting no concentration risk. None of the securities holds more than 2.28% of total assets. About 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 $280.7 million in its asset base and trades in a moderate average daily volume of 98,000 shares. The product has an expense ratio of 0.35% and lost about 3.1% over the past one month. The ETF has a Zacks Rank of 1.
iShares U.S. Insurance ETF ((IAK - ETF report) )
With AUM of $128.8 million, this product tracks the Dow Jones U.S. Select Insurance Index and charges 43 bps in annual fees. Volume is light, trading in about 21,000 shares per day. In total, the fund holds 67 securities in its basket with the largest allocation to American International at 13.9%, closely followed by Metlife at 10.6% and Prudential Financial at 7.4%. Other firms hold less than 6.2% of assets.
Here again, property and casualty insurance takes the top spot, accounting for just half of the asset base. Life insurance and full time insurance take the remaining portion in the basket. The fund is down 3.3% over the trailing one month and has a Zacks Rank of 2 (read: Top Ranked Insurance ETF in Focus: IAK).
PowerShares KBW Insurance Fund ()
This fund tracks the KBW Insurance Index and holds 25 securities in its basket. Out of these, TRV takes the top spot at 8.7% while AFL, MET and PRU also belong to the top five holdings with a combined 20.1% share. ALL and CB occupy the eight and tenth positions with 4% of KBWI each.
The product has amassed about $9.6 million in AUM while volume is very light. The ETF charges a low annual fee of 35 bps. KBWI is down 3.7% in the same period has a Zacks Rank of 1.
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