The second-quarter earnings season is in top gear with 57.2% members of the elite S&P 500 Index having reported solid quarterly numbers so far. Per the latest Earnings Preview, the performance of 286 index members (accounting for 68.8% of the index’s total market capitalization), having already reported their financial numbers this quarter, indicates that total earnings have increased 11.3% on 6.1% higher revenues. The beat ratio is impressive with 74.5% companies surpassing the bottom-line expectations and 69.2%, outperforming on the top-line front.
The Finance sector (one of the 16 Zacks sectors) has delivered a strong performance till now. About 70.5% companies on the S&P 500 Index that have reported quarterly results, shows 7.6% earnings growth on 5.1% increase in revenues, both on a year-over-year basis. The beat ratio of 79.1% for the bottom line compared favorably with that of the S&P 500. However, the beat ratio of 68.7% for the top line is lower than the same of 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. A few insurers are anticipated to have incurred losses due to natural calamities 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 capital reserve erosion, piled up on 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 confidence in the developing economic conditions. In fact, the Fed has raised interest rates 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 life insurers which suffered spread compression on products like fixed annuities and universal life due to continuous low rates. Annuity sales should have also 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 also supported more policy writings, driving the premiums higher to generate a lion’s share in an insurers’ top line. Besides, core business growth, geographic expansion, strategic buyouts and prudent capital deployment via share repurchase have probably boosted 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 ironing out the creases of pricing pressure. Commercial property, workers’ compensation and general liability were mostly experiencing soft pricing.
Let’s find out where the following insurers stand before their release of quarterly numbers on Aug 2.
American International Group Inc. (AIG - Free Report) is engaged in a range of global insurance and insurance-related activities through its subsidiaries. Last quarter, AIG substantially beat the Zacks Consensus Estimate by 22.52%. The company’s Zacks Rank #3 (Hold) and an Earnings ESP of -0.83% leave our earnings surprise prediction inconclusive. The Most Accurate estimate is pegged at $1.19 while the Zacks Consensus Estimate stands at $1.20. 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.
We expect performance at its Commercial Lines segment to remain stressed. Individual Retirement business too has remained low due to uncertainty stemming from the Department Of Labor’s fiduciary rule and lower fixed annuity sales limiting the sales improvement. Sales growth has likely improved in Life Insurance business. Expenses too have possibly moderated. (Read: AIG Gearing Up for Q2 Earnings: Will the Stock Surprise?)
With respect to the surprise trend, AIG beat estimates in two of the last four quarters but with an average negative surprise of 4.85%.
American International Group, Inc. Price and EPS Surprise
The Cincinnati Financial Corporation (CINF - Free Report) markets property and casualty insurance as its main business. Last quarter, Cincinnati Financial beat the Zacks Consensus Estimate by 9.26%. The company’s Zacks Rank #4 (Sell) with an Earnings ESP of 0.00% makes surprise prediction difficult. Both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 46 cents per share.
We caution against the Sell-rated stocks (#4 or 5) going into an earnings announcement.
Cincinnati Financial is likely to report higher catastrophe losses in the soon-to-be-reported quarter, which in turn will render volatility to the company’s earnings. The company has possibly recorded an increase in total benefits and expenses. However, the company may also display investment income growth in the second quarter, backed by an increase in both interest and dividend income. (Read: Cincinnati Financial Q2 Earnings: What's in Store?)
With respect to the surprise trend, Cincinnati Financial surpassed expectations in the last four quarters with an average beat of 7.59%.
Cincinnati Financial Corporation Price and EPS Surprise
Lincoln National Corp. (LNC - Free Report) is a diversified life insurance and investment management company. Last quarter, Lincoln National beat the Zacks Consensus Estimate by 18.52%. The company carries a Zacks Rank #2 and its Earnings ESP of -0.58% leaves our earnings surprise prediction inconclusive. The Most Accurate estimate is pegged at $1.72 per share, whereas the Zacks Consensus Estimate stands at $1.73 per share.
Life insurance business is expected to see top-line growth from a change in sales mix to fight the low interest rate environment. We also expect to see an increase in total annuity sales driven by product enhancements. Margins will get an extra cushion from disciplined expense management. (Read: Lincoln National Q2 Earnings: What's in the Cards?)
With respect to the surprise trend, Lincoln National outpaced estimates in three of the last four quarters with an average beat of 8.75%.
Lincoln National Corporation Price and EPS Surprise
MetLife Inc. (MET - Free Report) is a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. Last reported quarter, MetLife beat the Zacks Consensus Estimate by 14.96%. The company carries a Zacks Rank #3 with an Earnings ESP of 0.00% which makes surprise prediction difficult. Both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.28 per share.
Low interest rates and strong equity markets likely have induced derivate losses. We anticipate the company’s Property and Casualty (P&C) segment to suffer from the underperforming auto insurance business. We also expect to see an increase in variable investment income, driven by a favorable hedge fund performance and strong private equity. (Read: MetLife to Report Q2 Earnings: What's in the Cards?)
With respect to the surprise trend, MetLife surpassed estimates in three of the last four quarters. However, the average miss was 2.75%.
MetLife, Inc. Price and EPS Surprise
Prudential Financial Inc. (PRU - Free Report) offers an array of financial products and services including life insurance, annuities, retirement-related services, mutual funds, investment management and real estate services. Last quarter, Prudential beat the Zacks Consensus Estimate by 5.68%. The company’s Zacks Rank #3 and an Earnings ESP of -0.37% make surprise prediction difficult. The Most Accurate estimate is pegged lower at $2.69 compared with the Zacks Consensus Estimate’s $2.70 per share.
Prudential’s second-quarter earnings results are expected to have improved, banking on the strength of expanded product offerings, global presence and broader distribution capabilities. Strong account value growth is expected to have favored the company’s performance in the U.S. Retirement Solutions and Investment Management segment. However, rise in higher total benefits and expenses possibly have weighed on margin expansion. (Read: Prudential Financial Q2 Earnings: What's in the Cards?)
With respect to the surprise trend, Prudential outshined estimates in three of the last four quarters but with an average miss of 1.88%.
Prudential Financial, Inc. Price and EPS Surprise
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