The first-quarter earnings season has already seen 154 members of the elite S&P 500 index reporting financial numbers so far. Per the latest Earnings Preview, performances of these index participants indicate a 25.4% increase in total earnings on 10.3% higher revenues. The beat ratio is impressive with 80.5% companies surpassing bottom-line expectations and a 72.1%, outperforming on the top-line front. Per the Earnings Preview, earnings growth in the first quarter is registered as the strongest in seven years.
The Finance sector (one of the 16 Zacks sectors) has delivered a sturdy performance till now with earnings increasing 27.5% on 8.7% robust revenues. The beat ratio is solid with 80.5% companies exceeding bottom-line estimates and 61% outpacing the top-line mark. Per Earnings Preview, earnings are expected to rise 27% on 5.8% more revenues.
Integral to the Finance sector, the insurance industry is likely to witness better results this yet-to-be-reported quarter on the back of an improving rate environment, tax cuts, a favorable operating environment and a better domestic growth scenario.
A progressing interest rate environment is likely to have boosted higher net investment income, an important component of an insurer’s top line. Though the same is far from reaching a historical high, yet it is showing an upward trend. With economic growth gaining traction, the Fed has hiked rate five times since December 2015 and has hinted at two more raises this year, followed by three in 2019 and a couple of in 2020.
Although insurers have lowered their exposure to interest-sensitive product lines to weather the low rate environment, they stand to benefit from the increasing rates as investment yield improves.
The first quarter is likely to benefit from the tax cut. Per the implementation of the new tax rate effective January 2018, the tax incidence has been lowered to 21% from 35%. This rate reduction will probably provide an additional drive to insurers’ bottom line.
Although the first quarter witnessed a California mudslide as well as the northeast winter storms, the calamities still might not dent the company’s underwriting profitability. Insurers having already suffered the severities of cat loss last year, should have managed to withstand the shortfalls in the first quarter of 2018. A Morgan Stanley analyst estimates global insured cat loss between $5 billion and $10 billion.
Nonetheless, underwriting profitability is mildly strained. Recently, Chubb Limited (CB - Free Report) reported a drag of 64 cents on its bottom line attributable to cat loss.
Improved pricing, prudent underwriting practices, portfolio repositioning as well as resorting to reinsurance covers are expected to have helped insurers weather the deficits.
Diverse product portfolio, expanded geographies and strategic acquisitions might have enhanced insurers’ performance in the quarter to be reported.
Let’s find out how the following insurers are placed ahead of their quarterly releases on Apr 30.
Loews Corporation’s (L - Free Report) quarterly result is likely to be aided by a consistently better performance at CNA Financial, a Lowes subsidiary. Loews Hotels is likely to have continued to deliver a strong performance, banking on solid operations at its hotel properties. Boardwalk Pipeline is expected to have delivered better numbers on the strength of its growth projects.
However, lower day rate and lower rigs working are expected to have weighed on Diamond Offshore (DO) segment.
The Zacks Consensus Estimate of 78 cents per share for the yet-to-be-reported quarter reflects a 10.3% year-over-year decline. Loews carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. Nonetheless, combined with an Earnings ESP of 0.00%, makes our surprise prediction difficult as the company requires a positive ESP to be confident about an earnings surprise.
Loews Corporation Price and EPS Surprise
(Read more: Can Solid CNA Financial Results Drive Loews Q1 Earnings?)
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CNA Financial Corporation (CNA - Free Report) is likely to have witnessed higher premiums on new business growth as well as a solid retention. A favorable rate environment drove the investment income. Underwriting profitability is likely to have been affected by cat loss and the combined ratio has also probably deteriorated.
The Zacks Consensus Estimate is pegged at 90 cents for the soon-to-be-reported quarter, up 3.5% year over year. Though CNA Financial has a favorable Zacks Rank of 3, its Earnings ESP of -3.91% leaves surprise prediction inconclusive. (Read more: Will Higher Premiums Aid CNA Financial's Q1 Earnings?)
CNA Financial Corporation Price and EPS Surprise
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The consensus estimate for Kemper Corporation (KMPR - Free Report) stands at 69 cents, soaring 962.5% year over year. The company is a Zacks #3 Ranked player and has an Earnings ESP of 23.79%. This perfect combination makes us confident of an earnings surprise this to-be-reported quarter.
Kemper Corporation Price and EPS Surprise
The Zacks Consensus Estimate for Mercury General Corporation (MCY - Free Report) stands at 48 cents, up 140% year over year. The company has an Earnings ESP of 0.00%, making surprise prediction difficult and a Zacks Rank of 4, which lowers the predictive power of ESP.
Mercury General Corporation Price and EPS Surprise
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