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Can Higher Premiums Drive CNA Financial's (CNA) Q3 Earnings?

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CNA Financial Corporation (CNA - Free Report) is slated to report third-quarter 2018 results on Nov 5, before the market opens. In the last reported quarter, the company delivered a positive earnings surprise of 3.13%.

Why a Likely Positive Surprise?

Our proven model clearly shows that CNA Financial has the right combination of the following two key ingredients to beat estimates this earnings season.

Earnings ESP: CNA Financial has an Earnings ESP of +4.19%. This is because the Most Accurate Estimate is pegged at $1.18, higher than the Zacks Consensus Estimate of $1.13. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: CNA Financial holds a Zacks Rank #2 (Buy), which increases the predictive power of ESP as stocks with a favorable Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) along with a positive Earnings ESP have significantly higher chances of an earnings beat.

Conversely, the Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Driving the Better-Than-Expected Earnings

CNA Financial is likely to have witnessed premium growth in the to-be-reported quarter, fueled by a probable increase in new business, renewal premium change as well as solid retention. Also, higher premiums across its segments — Commercial, International and Specialty — are expected to drive this upside. In fact, the Zacks Consensus Estimate for the metric is pegged at $1.8 billion, reflecting a 1.9% rise from the prior-year period.

Riding on the strength of rising interest rates and a possibility of higher limited partnership returns as well as stable fixed income returns, we expect CNA Financial to witness better investment results in the third quarter.

Banking on improved premiums as well as investment results, CNA Financial has possibly experienced top-line growth in the quarter to be reported. The Zacks Consensus Estimate for revenues is currently pegged at $2.6 billion, representing a 7% increase from the year-ago quarter.

Further, the lower tax incidence is likely to aid the company’s bottom line with the consensus mark for earnings in the to-be-reported quarter being pegged at $1.13 per share, translating into a significant surge of 94.8% on a year-over-year basis.

CNA Financial continues to efficiently manage its long-term care book of business through product claim management, thus mitigating risk as well as aiding rate increase.

Being a property and casualty (P&C) insurer, CNA Financial remains exposed to unpredictable weather-related events that might have caused catastrophe loss in the to-be-reported quarter. Despite incurring catastrophe loss, we expect the insurer to report an improved combined ratio owing to its impressive track record of maintaining the same at favorable levels in spite of a challenging operating environment. In fact, the consensus mark for the combined ratio is pegged at 93%, representing a substantial improvement of 1100 basis points from the prior-year quarter.  

Further, the company has probably witnessed higher expenses, primarily due to increasing net incurred claims and benefits plus amortization of deferred acquisition costs. This rise in expenses might restrict the operating margin expansion, hurting the company’s overall profitability in turn.

Other Stocks to Consider

Some other stocks worth considering from the finance sector with the right combination of elements to also exceed estimates this time around are as follows:

National Health Investors, Inc. (NHI - Free Report) is set to report third-quarter earnings on Nov 6 and has an Earnings ESP of +0.24%. The company is a Zacks #2 Ranked player. You can see the complete list of today’s Zacks #1 Rank stocks here.

TCG BDC, Inc. (CGBD - Free Report) has an Earnings ESP of +1.65% and a Zacks Rank of 2. The company is set to release third-quarter earnings on Nov 6.

Prudential Financial, Inc. (PRU - Free Report) has an Earnings ESP of +0.13% and is a #2 Ranked stock. The company is set to announce third-quarter earnings on Nov 7.

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