Mixed Q2 Earnings Leave Little Effect On Insurance ETFs

The insurance corner of the financial sector has been under pressure due to the sluggish operating backdrop created by a prolonged low rate environment. This is because most insurance companies, in particular life insurance, invest in longer-duration bonds, which help them to earn more from their investment portfolios from higher interest rates (read: Top Performing Bond ETFs of 1H).

Although, the value of bonds keep trickling down with rising rates, holding the security until maturity rewards investors with the face value price, leading to no material loss for bondholders. However, the present interest rate scenario is just the opposite, thereby hurting insurance companies.

The Zacks Industry Rank also shows this as the health insurance industry is in the bottom 8%, the multi-line insurance industry is in the bottom 9% and the property and casualty (P&C) insurance industryis in bottom 33%, at the time of writing (read: A Comprehensive Guide to Insurance ETFs).

Against this backdrop, a look at second-quarter 2016 earnings is warranted.

Insurance Earnings in Focus

Earnings at one of the leading property and casualty insurers Chubb (NYSE:CB) reported second-quarter 2016 operating income of $2.25 per share, missing the Zacks Consensus Estimate by a penny. Also, the bottom line deteriorated 6.3% from $2.40 per share in the prior-year quarter.

Another property and casualty insurer and an industry bellwether, Allstate (NYSE:ALL) , topped the Zacks Consensus Estimate by 9 cents with operating earnings of 62 cents, which declined 1.6% from the year-ago quarter. Revenues, however, grew 3% year over year to $9.1 billion and edged past the Zacks Consensus Estimate of $8.1 billion.

Aflac (NYSE:AFL) , the seller of supplement health insurance, posted earnings per share of $1.71 beating our estimate by 3 cents and improving 14% year over year. Revenues grew 2.8% year over year to $5.4 billion but missed our estimate of $5.5 billion.

Earnings of $2.20 per share reported by personal property and casualty insurer Travelers (NYSE:TRV) trumped the Zacks Consensus Estimate by 8 cents but decreased 12.7% from the year-ago quarter. Revenues inched up 1.1% year over year to $6.8 billion and were ahead of our estimate of $6.7 billion (see all the Financial ETFs here).

MetLife (NYSE:MET) , the U.S. life insurer behemoth, reported Q2 earnings of 83 cents per share, missing the Zacks Consensus Estimate of $1.36 by 39%. Earnings plunged 47% year over year. Revenues of $16.95 billion also fell 2.4% year over year and were below our estimated $17.07 billion. Notably, post earnings release, the stock tumbled about 8.7% on August 4.

Prudential Financial (NYSE:PRU) , the second-largest U.S. life insurer, also missed our earnings estimate by 26.1% and declined 36.8% year over year. Revenues fell 5.5% year over year to $11.8 billion. Investors should also note that PRU lost about 4.4% on August 4 to reflect the downbeat Q2 and lost about 0.1% after hours.

The largest commercial insurer in the U.S. and Canada, American International Group’s (NYSE:AIG) Q2 operating income of 98 cents per share surpassed the Zacks Consensus Estimate of 91 cents. Earnings, however, plunged 29.5% year on year.

ETFs in Focus

Given mixed Q2 earnings, insurance ETFs – SPDR S&P Insurance ETF (LON:KIE) and iShares U.S. Insurance ETF IAK – delivered almost flat performances. KIE was up 0.08% while IAK was down about 0.5% in the last 10 days.

This was compared with 0.1% gains by the S&P 500-based (AX:SPY) and 0.13% returns offered by the broad financial ETF XLF and 0.7% by the bank ETF KBE. Below we highlight these ETFs in detail.

KIE in Focus

The fund holds 49 stocks in its basket. No stock accounts for more than 2.60% of the portfolio. 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 product has an expense ratio of 0.35%.

IAK in Focus

In total, the fund holds 60 securities in its basket with solid allocation going to American International (10.45%), Chubb (9.45%) and MetLife (7.96%). Here also, property & casualty insurance accounts for the largest share at 46.2% while life & health insurance and multiline insurance round off the top three positions with double-digit exposure each. The fund charges 45 bps in annual fees.

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