The third-quarter earnings season has begun with 26 of the S&P 500 index members having already reported their results. Only about 1% of the companies from the Finance sector have reported so far, marking 13.5% earnings growth on 14% higher revenues per our Earnings Outlook.
However, a soft performance from the insurance industry will drag the Finance sector’s third-quarter results. Per our Earnings Outlook, earnings are estimated to decline 45.1% on 0.7% lower revenues.
Being integral to the insurance industry, property and casualty insurers have suffered the wrath of a slew of catastrophes. Spells of tropical storms and tremors have rocked the operational performance of non-life insurers for the third quarter. While Hurricane Harvey wreaked havoc in August, Irma and Maria devastated parts of the United States in September. Adding to the woes, two consecutive earthquakes also hit Mexico last month.
Per the catastrophe modeler AIR Worldwide, the insured loss estimates from Irma could range between $25 billion and $35 billion and between $40 billion and $85 billion from Maria. Moody’s Analytics earlier estimated economic losses from Irma come in the $58-$83 billion band while that from Harvey could be as high as $108 billion. Capital reserve, built by insurers owing to a not-so-active catastrophe environment, will help companies meet insurance claims.
Underwriting profitability of insurers will be affected by deterioration in combined ratio due to catastrophe losses incurred. This in turn will drag the companies’ bottom line.
Though increasing catastrophes will induce fluctuation in underwriting results, insurers have braced themselves with prudent underwriting practices to withstand the loss to some extent.
Amid bad news, there are reasons for insurers to fall back on for cushion. Though the Fed hadn’t approved the rate hike at the last September meet, the interest rate has been nonetheless improving, albeit at a slower pace, courtesy three hikes made since December 2016. Investment income has also markedly improved from historical lows.
Strategic initiatives to have a diversified portfolio, mergers and consolidation to accelerate growth and expand globally, capital influx and effective capital deployment to enhance shareholders’ value position non-life insurers on a solid base against all odds.
Nevertheless, a beleaguered operating environment has shoved the industry down the ranking order to be currently placed at #242, thus representing the bottom 9% of the Zacks Industry Rank. The industry has also underperformed the S&P 500 index year to date. While the index has clocked a rally of 11.7%, the industry has gained 13.9%.
Move Over the Following Stocks
We picked stocks carrying a bearish Zacks Rank #4 (Sell) or #5 (Strong Sell) with an adverse VGM Score, as estimates moved downward over the last 30 days. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Shares of these companies have also badly declined over the last 12 weeks.
AXIS Capital Holdings Limited (AXS - Free Report) is a global provider of specialty lines insurance and treaty reinsurance. The stock carries a Zacks Rank of 4. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 161.8% downward and 2.6% south for 2018 over the last 30 days. The stock has a VGM Score of D. Shares of AXIS Capital have slid1.8% in the last 12 weeks.
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The Travelers Companies Inc. (TRV - Free Report) provides a wide variety of property and casualty insurance and surety products and services to businesses, organizations and individuals in the United States and select international markets. This company is also Zacks #4 Ranked. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 9.25% downward and 10.8% south for 2018 over the last 30 days. The stock has a VGM Score of D. Shares of Travelers have slipped 0.7% in the last 12 weeks.
XL Group Ltd. (XL - Free Report) operates as an insurance and reinsurance company worldwide. This too is a #4 Ranked company. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 158.3% downward and 4.1% south for 2018 over the last 30 days. The stock has a VGM Score of F. Shares of Travelers have lost 14.6% in the last 12 weeks.
Alleghany Corporation (Y - Free Report) engages in property and casualty reinsurance and insurance businesses in the United States and internationally. The company again carries a weak Zacks Rank #4. The stock has seen the Zacks Consensus Estimate current-year earnings being revised 136.0% downward and 4.9% south for 2018 over the last 30 days. The stock has a VGM Score of D. Shares of Travelers have decreased 14.6% in the last 12 weeks.
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