The second-quarter earnings season has rolled out with 19% members of the elite S&P 500 Index reporting solid quarterly numbers so far. Per the latest Earnings Preview, the performance of 97 index members (accounting for 28.1% of index’s total market capitalization) that have already reported their financial numbers this quarter, indicate that total earnings have increased 8.4% on 5.1% higher revenues. The beat ratio is impressive with 78.4% companies surpassing the bottom-line expectations and 72.2% outperforming on the top-line front.
The Finance sector (one of the 16 Zacks sectors) has delivered a strong performance so far. 53.3% of the sector’s total market cap in the S&P 500 index that have reported quarterly results shows 7.2% earnings growth on 5.4% increase in revenues, both on a year-over-year basis. The beat ratio of 81.1% for the bottom line and 66.7% for the top line is higher than the beat ratio of the S&P 500.
The second quarter witnessed several catastrophe losses, which will weigh on underwriting results as well as the bottom line of insurers. Per Aon Benfield, the global reinsurance intermediary and capital advisor of Aon plc (AON - Free Report) , catastrophe losses suffered globally is estimated at $53 billion in the first half of 2017. Few insurers have estimated to have incurred catastrophe losses in the second quarter stemming from severe wind and hail catastrophe events occurred during April and May in the U.S.
The Allstate Corp. (ALL - Free Report) projects $638 million in catastrophe loss while Kemper Corporation (KMPR - Free Report) estimates the same between $32 million and $38 million.
Nonetheless, prudent underwriting standards should have helped insurers guard against a capital reserve erosion that has built up owing to a benign catastrophe environment.
Net investment income, a major component of an insurer’s top line, has witnessed improvement; albeit far lower than the historical highs. The Federal Reserve has been increasing the interest rates, reflecting their confidence in the improving economic conditions. The Fed has raised interest rate thrice in three quarters. An improving rate environment not only aided an increase in Net investment income but has also improved investment yields.
Higher rates should offer some respite to life insurers that suffered spread compression on products like fixed annuities and universal life due to persistently low rates. Annuity sales too should have benefited from higher rates. Nonetheless, life insurers have considerably lowered their exposure to interest-sensitive product lines.
Also, improving economy means more disposable income and better consumer sentiment. This in turn, is likely to have supported more policy writings, driving premiums higher, which contribute a lion’s share in an insurers’ top line.
On the flip side, we do not expect pricings to have been strong. To write new business and retain renewals, insurers have been easing pricing, leading to soft pricing. Commercial property, workers’ compensation and general liability were the once mostly experiencing soft pricing.
Nonetheless, core business growth, geographic expansion, strategic buyouts and prudent capital deployment via share repurchase have benefited insurers.
This week will see more than 800 companies reporting their quarterly results, including 183 S&P 500 members.
Let’s find out how these four insurers might perform when they release their quarterly numbers on Jul 26.
XL Group plc (XL - Free Report) is one of the world’s leading providers of insurance, reinsurance and financial risk solutions for enterprises and insurance companies. In the last reported quarter, XL Group beat the Zacks Consensus Estimate by 8.70%. The company’s Zacks Rank #4 (Sell) and an Earnings ESP of -1.12% complicate the surprise prediction. The Most Accurate estimate is pegged at 88 cents while the Zacks Consensus Estimate stands at 89 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for an earnings beat. However, we caution against the Sell-rated stocks (#4 or 5), that should never be considered going into an earnings announcement. You can see the complete list of today’s Zacks #1 Rank stocks here.
Banking on higher gross premiums written at Reinsurance segment, the top line has likely improved. Share buyback boosted the bottom line. However, catastrophe loss induced volatility in underwriting results. (Read: XL Group Q2 Earnings: Is it Likely to Disappoint?)
With respect to the surprise trend, XL Group beat expectations in the last four quarters with an average positive surprise of 28.14%.
XL Group Ltd. Price and EPS Surprise
Torchmark Corp. (TMK - Free Report) provides annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements and long-term healthcare policies. In the last reported quarter, Torchmark beat the Zacks Consensus Estimate by 0.88%. The company has a Zacks Rank #4 and an Earnings ESP of 0.0% make surprise prediction difficult. The Most Accurate estimate as well as the Zacks Consensus Estimate stand at $1.17 per share.
Higher premiums from the Life and Health segments should have aided bottom line improvement Excess investment income likely have risen. However, administrative expenses and total benefits and expenses likely have weighed on margin expansion. (Read: Torchmark Q2 Earnings: Disappointment in the Cards?)
With respect to the surprise trend, Torchmark beat expectations in the last four quarters but the average beat was 2.01%.
Torchmark Corporation Price and EPS Surprise
Markel Corporation (MKL - Free Report) markets and underwrites specialty insurance products in the United States and internationally. In the last reported quarter, Markel missed the Zacks Consensus Estimate by 32.37%. The company has a Zacks Rank #3 and an Earnings ESP of 0.00% complicate its surprise prediction. Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $6.27 per share.
With respect to the surprise trend, Markel missed expectations in only one of the last four quarters with an average beat of 0.83%.
Markel Corporation Price and EPS Surprise
Arch Capital Group Ltd. (ACGL - Free Report) offers insurance, reinsurance and mortgage insurance across the world. In the last reported quarter, Arch Capital beat the Zacks Consensus Estimate by 6.77%. The company has a Zacks Rank #4 with an Earnings ESP of +0.83% which complicates the surprise prediction. The Most Accurate estimate is pegged at $1.21 while the Zacks Consensus Estimate is pegged at $1.20 per share.
With respect to the surprise trend, Arch Capital beat expectations in the last four quarters with an average beat of 11.43%.
Arch Capital Group Ltd. Price and EPS Surprise
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