The second-quarter earnings season is picking up pace with 26% members of the elite S&P 500 Index having reporting quarterly numbers already. Per the latest second-quarter scorecard, the performance of 128 index members (accounting for 36.1% of the index’s total market capitalization) that have already reported their financial numbers this quarter, indicate that total earnings have increased 7% on 4.2% higher revenues. The beat ratio is impressive with 77.3% companies surpassing the bottom-line expectations and 70.3% outperforming on the top-line front. (For more information, please consult our Zacks Earnings Analysis).
The Finance sector’s results (one of the 16 Zacks sectors) have not been very impressive, but aren’t too disappointing either. Of the sector’s total market cap in the S&P 500 index, 54.1% that have reported quarterly results show 7.4% earnings growth on 5.4% increase in revenues, both on a year-over-year basis. The beat ratio of 82.9% for bottom line and 68.6% for top line is higher than the beat ratio of the S&P 500.
The insurance industry is part of the broader Finance sector. Let’s see how the second quarter has turned up for insurers.
Results of insurers exposed to catastrophe losses will witness a dent in underwriting margins on account of several catastrophe losses that occurred during the quarter under review. Per Aon Benfield, the global reinsurance intermediary and capital advisor of Aon plc (AON), catastrophe losses suffered globally is estimated at $53 billion in the first half of 2017. Some insurers have estimated catastrophe losses in the second quarter stemming from severe wind and hail catastrophe events during April and May in the U.S.
The Allstate Corp. projects $627 million (pre-tax) in catastrophe loss while Kemper Corporation estimates the same between $32 million and $38 million.
Another component of insurer’s top line, net investment income, has witnessed improvement, but still remains below historical levels, owing to still-low interest rates.
Nevertheless, the recent increase in interest rates by the Fed 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 benefit from higher rates. Nonetheless, life insurers have considerably lowered their exposure to interest-sensitive product lines.
Top line may also benefit from an improving economy and revived consumer sentiments which may lead to increased demand for insurance products.
On the flip side, pricing woes linger. Insurers having fat capital reserves are fighting hard to gain business in a highly competitive environment and one of the most common ways to achieve underwriting targets is by lower pricing. Certain lines of insurance – commercial property, workers’ compensation and general liability are mostly experiencing soft pricing.
Nonetheless, core business growth, geographic expansion, mergers and acquisitions and prudent capital deployment via share repurchase are like to benefit insurers.
Let’s peek into these five insurance companies that are gearing up to report their second-quarter results on Jul 27.
Aflac Inc. (AFL - Free Report) has an Earnings ESP of 0.00% as the Most Accurate estimate of $1.63 is in line with the Zacks Consensus Estimate. This makes surprise prediction difficult despite the company’s Zacks Rank #3. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Last quarter, Aflac, beat the Zacks Consensus Estimate by 3.09%. It surpassed expectations in three of the last four quarters, with an average positive earnings surprise of 0.85%.
Aflac’s Japan business is expected to benefit from an increase in third-sector sales given the company’s emphasis on promoting these products which are less interest rate sensitive and carry strong and stable margins. In its U.S. business segment, we expect to see improved persistency, which in turn should support premium growth. The company will, however, incur high cost on account of its Japan branch conversion (read more: Will Changing Business Strategy Aid Aflac Q2 Earnings?).
The Hartford Financial Services Group, Inc. (HIG - Free Report) has an Earnings ESP of 0.00% as the Most Accurate estimate of 95 cents is in line with the Zacks Consensus Estimate. Hartford Financial has a Zacks Rank #4 (Sell). We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Last quarter, Hartford Financial, missed the Zacks Consensus Estimate by 1.96%. In two of the last four quarters, Hartford Financial missed expectations. It has an average negative earnings surprise of 9.41% of the last four quarters.
We expect Hartford Financial’s results to be supported by improved performance of its Personal Auto business. Commercial Lines in small and middle markets are likely to perform well, boosting both the top and the bottom lines, continuing the previous quarter’s trend. The Group Benefit and Mutual Funds segment will likely deliver a solid performance, reflecting the company’s claims expertise and improvements made in its book of business over the years (read more: Hartford Financial Q2 Earnings: What's in the Offing?).
Marsh & McLennan Companies, Inc. (MMC - Free Report) has an Earnings ESP of 0.00% as the Most Accurate estimate of $1.00 is in line with the Zacks Consensus Estimate. Marsh & McLennan has a Zacks Rank #4.
Last quarter, Marsh & McLennan, exceeded the Zacks Consensus Estimate by 9.09%. Marsh & McLennan surpassed expectations in two of the last four quarters, with an average positive earnings surprise of 3.76%.
The company is quite aggressive in making acquisitions, which constitute an important part of its capital allocation strategy. The synergistic effect of a number of purchases made by the company over the past many quarters will lead to revenue accretion. The company has undertaken restructuring initiatives which will cause it to incur related charges. Also, foreign exchange movement might have a slight negative impact on earnings (read more: What's in Store for Marsh & McLennan in Q2 Earnings?).
Arthur J. Gallagher & Co. (AJG - Free Report) has an Earnings ESP of +0.98% as the Most Accurate estimate of $1.03, is a penny higher than the Zacks Consensus Estimate. Arthur J. Gallagher has a Zacks Rank #4.
Last quarter, Arthur J. Gallagher, surpassed the Zacks Consensus Estimate by 2.56%. Arthur J. Gallagher surpassed expectations in three of the last four quarters, with an average positive earnings surprise of 1.23%.
Arthur J. Gallagher is likely to report bottom-line growth in the second quarter, mainly due to solid performance by both its Brokerage and Risk Management business lines. Furthermore, the insurance broker is likely to register top-line growth on the back of organic sales as well as strategic mergers and acquisitions (read more: Arthur J. Gallagher Q2 Earnings: What's in Store?).
Unum Group (UNM - Free Report) has an Earnings ESP of 0.00% as the Most Accurate estimate of $1.01 is in line with the Zacks Consensus Estimate. Unum Group has a Zacks Rank #4.
Last quarter, Unum Group, surpassed the Zacks Consensus Estimate by 2.00%. Unum Group surpassed expectations in each of the last four quarters, with an average positive earnings surprise of 3.39%.
Unum Group is likely to witness a decline in operating income at its Unum U.K. business in the soon-to-be-reported quarter. The company is also likely to experience lower sales volume in this segment.
Further, the company is likely to report lower premium income at its Closed Block segment, owing to expected policy terminations and maturities for the individual disability line of business (read more: Unum Group Earnings: What's in Store for the Stock?).