A benign catastrophe loss, pricing gains, increasing interest rate, a strong macroeconomic environment and solid capital levels paint a favorable operating picture for the insurance sector. With the flush of capital, players in the industry (primarily owing to very low cat loss in the past years) have been able to invest in growth, both organic and inorganic, that has been generating synergies.
With enough surplus capital at disposal, insurers have resorted to mergers and acquisition in an effort to gain in scale and size to achieve fast-paced growth. Massive investments in technology are also being made with an aim to improve operational efficiency, which will consequently generate cost savings and fuel business growth.
Having faced with an ultra-low interest rates (for the past many years) and volatile equity markets, companies by and large have undertaken reconciliatory strategies to redo their business and product mix strategies to make businesses more immune to these external vagaries. To this end, many players have reduced their exposure to long-term guaranteed life insurance and fixed annuities products.
The combined effect of these strategies is now being witnessed in their operating performance, and has paved the way for long-term sustainable growth.
Let’s see some of the factors that might affect Q2 earnings.
Insurers, after being badly hit in 2017, due to a number of unprecedented catastrophes, braved price hikes,that remained soft for quite some time. Dallas-based MarketScout, which compiles the composite rate for both the personal and commercial lines marketplace by analyzing market conditions via pricing surveys conducted by the National Alliance for Insurance Education,has reported that Composite Property and Casualty and Personal Line rates was up in 2Q18. These price hikes coupled with prudent underwriting practices and adherence to reinsurance covers must have catalyzed into improved underwriting gains in the to-be-reported quarter.
Not-So Inclement Weather
Despite a few cat events like rain storms in the United States and Canada that occurred during the second quarter andcaused losses were not so intense and Mother Nature remained kind. This was a positive for insurers, property and casualty in particular. A Morgan Stanley analyst estimates global insured cat loss of about $7.1 billion in the second quarter per a carriermanagement.com report. The analyst also noted that the count is much lower than the general tally of around $14 billion that insurers have usually suffered as a result of natural calamities in any given second quarter.
A lower cat loss should help insurers’ loss ratio, which measures the amount of claims paid as a percentage of premium earned. It is to be noted that the lower the loss ratio the greater will be the profitability.
Increasing Interest Rates
The hike approved by the Federal Reserve in June, marked the sixth increase since December 2016, the rate currently stands at 2%. The second quarter thus continues to enjoy the positive impact of an increasing rate environment, driving the insurers’ investment results.
Though insurers have lowered their exposure to interest-sensitive product lines to weather the low-rate environment, the accelerated pace of rate hikes should benefit their investment portfolio.
A rising rate environment is actually like a double-edged sword, as higher rates decrease the value of outstanding bonds that have been issued at lower rates, particularly so for long-dated bonds. Thus, insurers that have positioned their investment assets at the short end of the maturity curve will be better off.
Margin Accretion From Lower Tax Rate
The Tax Cuts and Jobs Act implemented at the start of this year, has lowered the tax outgo. The immediate effect of this benefit is stronger bottomline. Also, many companies are planning to use the saving from lower tax to invest in business development, which should generate long-term growth.
Surplus Capital for Buybacks
Part of the surplus capital must have been returned to shareholders in the form of share buyback and dividend payouts. Share buybacks provide an extra cushion to earnings because of its reductive effect on shares.
Increase in Operating Expense
Increased expenses for product development, marketing, sales supportand general administration should reduce operating earnings to some extent. One major shift being witnessed in the industry is investment in technology. While increased automation will definitely bring cost savings in the years ahead, margins will bear the burden of increased costs.
Ways to Pick the Perfect Insurance Stocks
Given the favorable backdrop of the insurance industry, investors can identify several stocks poised to deliver a positive earnings surprise in the upcoming reports.
Choosing the right stock for one’s portfolio from too many participants is certainly a tough task for investors. But an easy way to streamline the list is by selecting stocks with a positive Earnings ESPand a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which help surpassing the estimates.
Per our proprietary methodology, Earnings ESP is the determining factor for zeroing in on stocks with the maximum chances of beating on earnings in the next announcement. It shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Please check our Earnings ESP Filter that enables you to come across stocks with potential to outshine earnings estimates this reporting cycle.
Our research shows that the stocks with the perfect combination of the two key ingredients have 70% chances of a positive earnings surprise.
For investors seeking to apply this proven model to their portfolios, we have highlighted some insurance stocks which might stand out from the crowd with an earnings beat in the upcoming releases.
Amerisafe Inc. (AMSF - Free Report) is a specialty provider of workers' compensation insurance focused on small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging, agriculture, oil and gas, maritime and sawmills.
With a Zacks Rank #3 (Hold) and an Earnings ESP of +5.00%, Amerisafe looks well-poised for a positive surprise. With respect to the surprise trend, the company’s earnings surpassed expectations in three of the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
Berkshire Hathaway Inc. (BRK.B - Free Report) a holding company for a multitude of businesses, run by its famous Chairman and CEO, Mr. Warren Buffett. Insurance is its one of its major business.
The stock carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +3.75%.The Zacks Consensus Estimate for the second quarter is pegged at $2.27 per share, up 35.9% year over year.
Athene Holdings Ltd. (ATH - Free Report) is a retirement services company providing fixed and fixed indexed annuity products, reinsurance services.
The stock carries a Zacks Rank of 2 with an Earnings ESP of +1.12%. With respect to the surprise trend, the company’s earnings surpassed expectations in each of the last four quarters.
Brighthouse Financial, Inc. (BHF - Free Report) provides life insurance and annuity solutions primarily in the United States.
The stock carries a Zacks Rank of 3 and an Earnings ESP of +0.94%. With respect to the surprise trend, the company’s earnings surpassed expectations in two of the last four quarters.
Prudential Financial, Inc. (PRU - Free Report) provides life insurance, annuities, retirement-related services, mutual funds and investment management services and products.
The stock carries a Zacks Rank #2 and has an Earnings ESP of +0.06%. With respect to the surprise trend, the company’s earnings surpassed expectations in three of the last four quarters.
Willis Towers Watson Public Limited Company (WLTW - Free Report) is an advisory, broking and solutions company.
The stock carries a Zacks Rank #3 and has an Earnings ESP of +0.53%. With respect to the surprise trend, the company’s earnings surpassed expectations in two of the last four quarters.
American Financial Group Inc. (AFG - Free Report) is a property and casualty insurance (P&C), focusing on specialized commercial products for businesses, and in the sale of traditional fixed and fixed-indexed annuities.
The stock carries a Zacks Rank of 2 and has an Earnings ESP of +1.68%. The company beat estimates in each of the four trailing quarters, with an average positive surprise of 26.67%.
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