The second-quarter earnings season is well underway with 34.2% members of the elite S&P 500 Index reporting solid quarterly numbers so far. Per the latest Earnings Trends, the performance of 171 index members (accounting for 44.1% of the index’s total market capitalization), having already reported their financial numbers this quarter, indicates that total earnings have increased 8.8% on 3.4% higher revenues. The beat ratio is impressive with 78.9% companies surpassing the bottom-line expectations and 70.8%, outperforming on the top-line front.
The Finance sector (one of the 16 Zacks sectors) has delivered a strong performance so far. About 43.2% of the S&P 500 index members, that have reported quarterly results, shows 7.7% earnings growth on 5.2% increase in revenues, both on a year-over-year basis. The beat ratio of 82.9% for the bottom line and 70.7% for the top line is higher than the beat ratio of the S&P 500.
The second quarter witnessed several catastrophe losses, which are likely to 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) , the estimated amount of catastrophe losses suffered globally is $53 billion in the first half of 2017. Few insurers are expected 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.
Nonetheless, prudent underwriting standards should have helped the insurers guard against a capital reserve erosion, 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 developing economic conditions. The Fed has raised interest rate thrice in three quarters. A better rate environment not only increased Net investment income but has also improved investment yields.
Higher rates should offer some respite to the life insurers which 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. However, life insurers have considerably lowered their exposure to interest-sensitive product lines.
Notably, an improving economy means more disposable income and a better consumer sentiment. This in turn might have supported more policy writings, thus driving the premiums higher to contribute a lion’s share in an insurers’ top line. This apart, core business growth, geographic expansion, strategic buyouts and prudent capital deployment via share repurchase have possibly benefited the insurers.
On the flip side, we do not expect pricings to have been strong. To write new business and retain renewals, insurers have been easing out pricing pressure. Commercial property, workers’ compensation and general liability were mostly experiencing soft pricing.
Let’s evaluate the performance of the following three insurers ahead of their release of quarterly numbers on Jul 31.
CNA Financial Corporation (CNA - Free Report) offers commercial P&C insurance products, mainly across the United States. Last quarter, CNA Financial substantially beat the Zacks Consensus Estimate by 10.13%. The company’s Zacks Rank #3 (Hold) and an Earnings ESP of +4.00% make us confident of an earnings beat this time. The Most Accurate estimate is pegged at 78 cents while the Zacks Consensus Estimate stands at 75 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 for an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.
CNA Financial is likely to report bottom-line growth in the second quarter on the back of better performance across its Specialty, International as well as Life & Group Non-Core segments. Rising interest rate environment likely have favored higher net investment income. Disciplined approach toward the market is expected to have resulted in an improvement in new business. However, higher expenses might have hurt the company’s overall profitability. (Read: CNA Financial Q2 Earnings: Is a Beat in the Cards? )
With respect to the surprise trend, CNA Financial beat estimates in three of the last four quarters with an average positive surprise of 12.45%.
CNA Financial Corporation Price and EPS Surprise
Loews Corporation provides commercial property and casualty insurance in the United States, Canada, the United Kingdom, Continental Europe and Singapore. Last reported quarter, Loews significantly beat the Zacks Consensus Estimate by 31.82%. The company with a Zacks Rank #4 and an Earnings ESP of -5.26% make surprise prediction difficult. The Most Accurate estimate is pegged at 72 cents while the Zacks Consensus Estimate stands at 76 cents per share.
We caution against the Sell-rated stocks (#4 or 5), going into an earnings announcement.
Ongoing challenging conditions in the offshore drilling market might have induced lower revenues at its Diamond Offshore (DO - Free Report) . Due to challenging market conditions, thereby resulting in lower rates and a decreased insured exposure likely have hurt underwriting results. Loews Corp. has likely witnessed a solid performance at Boardwalk Pipeline Partners (BWP - Free Report) and Loews Hotels units in the second quarter. Additionally, the company’s subsidiary, CNA Financial’s improved results have in turn likely boosted its overall second-quarter performance. (Read: Loews Corp Q2 Earnings: Is Disappointment in Store?)
With respect to the surprise trend, Loews surpassed expectations in the last four quarters. But the average beat was 25.77%.
Loews Corporation Price and EPS Surprise
Mercury General Corporation (MCY - Free Report) engages in writing personal automobile insurance in the United States. Last reported quarter, Mercury General hugely missed the Zacks Consensus Estimate by 63.64%. The company carries a Zacks Rank #4 and an Earnings ESP of +20.00% complicate its surprise prediction. The Most Accurate estimate is pegged at 60 cents compared with the Zacks Consensus Estimate, standing at 50 cents per share.
With respect to the surprise trend, Mercury General outperformed estimates in two of the last four quarters. However, the average miss was 15.79%.
Mercury General Corporation Price and EPS Surprise
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