The Finance sector is set to kick off its earnings season next week with major banks reporting quarterly results. Per the Earnings Outlook, Finance is one of those 10 Zacks sectors that are set to deliver double-digit earnings growth. Earnings for the sector are expected to increase 29.5% on 3.2% higher revenues. An improving rate environment and tax cuts should continue to drive the sector’s performance.
Integral to the Finance sector, insurers are expected to deliver better numbers though catastrophe loss could weigh on their earnings results.
Accelerated Pace in Rate Hike
Banking on progress in economy, a low level of unemployment level and inflation of the Fed’s 2% target, the Central Bank has hiked the rate for the third time this year. With the latest raise of one-quarter percentage points at the September FOMC meeting, the interest rate now stands at 2.25%.
Given a rising rate environment, investment income — an important component of insurers’ top line — should continue to trend up.
Hurricane Florence Denting Underwriting Results
Though the third quarter of 2018 was not as devastating as last year’s, the period still bore the brunt of Hurricane Florence.
Catastrophe modeller Risk Management Solutions expects cat loss between $15 million and $20 billion, stemming from Hurricane Florence. Also, Citigroup analysts estimated Travelers to incur losses of roughly $42 million for each $1 billion in insured losses followed by Allstate at $37 million, Chubb at $25 million and Progressive at $21 million as these companies have a large exposure in North Carolina where Florence made a landfall last month.
Recently, United Insurance Holdings Corp. announced to have incurred $35 million pre-tax catastrophe loss.
Pricing Firms Up
Due to a benign catastrophe environment, insurers witnessed 19 back-to-back quarters of soft pricing market. However, following last year’s destruction, insurers started to raise price from the fourth quarter of 2017.
Per Willis Towers Watson plc’s Commercial Lines Insurance Pricing Survey, commercial insurance prices in the United States increased nearly 3% during the second quarter of 2018. This marks the third successive quarter of price rise.
Per the survey, price increased across commercial auto (a double-digit rise for the third straight quarter), commercial property (low- to mid-single digits’ increase for the third consecutive quarter) and excess/umbrella liability.
Improved pricing, prudent underwriting practices, portfolio repositioning and reinsurance covers will help insurers weather headwinds.
Tax Reforms and Capital Deployment
A lower level of tax incidence, courtesy of implementation of the new tax rate, effective first-quarter 2018 has been boosting earnings of the companies. This in turn, will not only aid margin expansion but also hike dividend payouts owing to higher net profit available to shareholders.
First American Financial Corporation approved a 10.5% raise in dividends while American Financial Group Inc. has announced an annual dividend hike of 14%. Radian Group Inc. has approved a $100-million repurchase of its common stock.
Also, the insurance industry boasts an all-time high capital level, helping it pursue strategic mergers and acquisitions.
Favorable Employment Scenario
An average of 0.2 million increase in jobs has been reported over the past three months. Per U.S. Bureau of Labor Statistics, unemployment rate was 3.9% in August and marked the 18-year low level while yearly wage growth was 2.9%, hitting a nine-year high level.
The Insurance industry has outperformed the Zacks S&P 500 Composite index during the third quarter. While the industry has increased 9.5%, the elite index has gained 7.1%.
Although Hurricane Florence descended as bad news, insurers are still well poised to deliver better quarterly results on the back of several tailwinds. With the help of our Zacks Stock Screener,, we identified stocks poised to outshine the Zacks Consensus Estimate in the third quarter. Our proven model conclusively states that because of an ideal combination of the two ingredients — a positive Earnings ESP and a favorable Zacks Rank — the following stocks are likely to surpass expectations at respective earnings announcement. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Also, these stocks flaunting an encouraging earnings history, reflect operational excellence.
The Progressive Corporation (PGR - Free Report) provides personal and commercial auto insurance, residential property insurance plus other specialty property-casualty insurance and related services, primarily in the United States.
Zacks Rank #2 (Buy)
Earnings ESP: +0.42%
Average four-quarter positive surprise: 9.19%
The Zacks Consensus Estimate of $1.07 is estimated to skyrocket 163.4% year over year in Q3.
The Zacks Consensus Estimate for 2018 bottom line has been revised 1.6% upward over the past four weeks.
The Hartford Financial Services Group, Inc. (HIG - Free Report) provides insurance and financial services to individual and business customers in the United States.
Zacks Rank #3 (Hold)
Earnings ESP: +0.32%
Average four-quarter positive surprise: 9.88%
The Zacks Consensus Estimate of $1.11 is estimated to surge 85% year over year in Q3.
The Zacks Consensus Estimate for 2018 bottom line has been revised 0.2% upward over the past four weeks.
RenaissanceRe Holdings Ltd. (RNR - Free Report) provides reinsurance and insurance coverages in the United States and internationally.
Zacks Rank #1
Earnings ESP: +9.68%
Average four-quarter positive surprise: 31.16%
The consensus estimate of $1.69 for 2018 earnings is projected to soar 116.3% year over year in Q3.
Athene Holding Ltd. (ATH - Free Report) issues, reinsures and acquires retirement savings products in the United States.
Zacks Rank of 1
Earnings ESP: +6.01%
Average four-quarter positive surprise: 15.13%
The Zacks Consensus Estimate of $1.62 is estimated to rise 37.3% year over year in Q3.
The Zacks Consensus Estimate for 2018 bottom line has been revised 0.5% upward over the past four weeks.
Cigna Corporation (CI - Free Report) provides insurance and related products and services in the United States and globally.
Zacks Rank #1
Earnings ESP: +0.74%
Average four-quarter positive surprise: 15.61%
The Zacks Consensus Estimate of $3.45 is estimated to increase 21.9% year over year in Q3.
Torchmark Corporation (TMK - Free Report) provides various life and health insurance products and annuities in the United States, Canada and New Zealand.
Zacks Rank of 2
Earnings ESP: +0.53%
Average four-quarter positive surprise: 1.68%
The Zacks Consensus Estimate of $1.52 is estimated to surge 23.6% year over year in Q3.
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