Given a favorable operating backdrop, the insurance industry is likely to witness better results this earnings season. However, the occurrences of catastrophe events are anticipated to have weighed on this upside. A diversified portfolio, wide geographic footprint, strategic consolidations as well as lower taxes are expected to have enhanced insurers’ performance in the quarter to be reported.
The insurance industry has been reaping benefits from an improving rate environment, favoring net investment income, which is an important component of insurers’ revenues. Insurers invest a big chunk of their premiums collected to be able to provide funds at the time of claims or upon maturity (in case of life insurance). Given the accelerated pace of rate hikes, insurers should gain from an increase in yields on their investment income.
Due to a benign catastrophe environment, insurers witnessed 19 back-to-back quarters of soft pricing market. However, following last year’s destruction caused by a series of hurricanes, insurers started to raise prices from fourth-quarter 2017 onward. These in turn likely have aided improvement in premiums in the third quarter.
Per insurancenetnews, in the United States, the composite rate during the third quarter of 2018 increased 2.5%, matching the rate increase of the second quarter. However, the magnitude of price gains was uneven for different business lines. For instance, trucking and commercial auto saw rate hikes of more than 6%. General liability rates inched up in the range of 1-3%
Nonetheless, property and business interruption coverages slipped 1% sequentially. The rate decrease remained with workers’ compensation as rates declined on average by 3% in the third quarter, in line with the second-quarter drop.
Though the third quarter of 2018 was not as devastating as the year-ago period, the phase still bore the brunt of Hurricane Florence weighing on the underwriting profitability and deteriorating combined ratios. Catastrophe modeler Risk Management Solutions expects cat loss between $15 million and $20 billion, stemming from Hurricane Florence.
A lower level of tax incidence, courtesy of the new tax rate effective first-quarter 2018, has been boosting the margins. This in turn, will not only aid margin expansion but also lead to dividend payouts owing to higher net profit available to shareholders.
Also, the insurance industry boasts an all-time high capital level, which continued to help it pursue strategic mergers and acquisitions.
Let’s take a sneak peek at the following insurers’ positions prior to their third-quarter earnings reports on Nov 5.
Brighthouse Financial, Inc.’s (BHF - Free Report) third-quarter premiums are likely to benefit from a compelling portfolio of life and annuity products coupled with its strong market presence. Its growing asset base and an ongoing repositioning of the investment portfolio along with an improving rate environment is expected to boost higher investment income. The company anticipates corporate expenses to be considerably high in the quarter to be reported. (Read more: What's in Store for Brighthouse Financial Q3 Earnings?)
The Zacks Consensus Estimate for earnings of $2.19 per share in the yet-to-be-reported quarter reflects a 10.6% year-over-year rise. Although the company’s Zacks Rank #3 (Hold) increases the predictive power of ESP, its Earnings ESP of -1.02% leaves surprise prediction inconclusive as the company needs a positive ESP to be confident about a likely earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The company surpassed estimates in two of the last four reported quarters, the average negative surprise being 22.57%.This is depicted in the chart below:
Brighthouse Financial, Inc. Price and EPS Surprise
Loews Corporation’s (L - Free Report) third-quarter earnings should benefit from sustainably strong performances across CNA Financial Loews Hotels. Boardwalk Pipeline is projected to deliver better numbers on the strength of its growth-driving projects. However, lower day rate, drop in contract drilling revenues and lower rigs working are predicted to weigh on the Diamond Offshore segment. (Read more: Loews Corp Q3 Earnings: What Lies Ahead for the Stock?)
The Zacks Consensus Estimate for EPS of 98 cents for the third quarter indicates a staggering increase of 113% year over year. Loews carries a Zacks Rank of 3 but has an Earnings ESP of 0.00%, which complicates the stock’s surprise prediction.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company’s earnings trumped estimates in each of the trailing four reported quarters, the outstanding average being 558.37%. The same is depicted in the chart below:
Loews Corporation Price and EPS Surprise
CNA Financial Corporation (CNA - Free Report) is likely to witness higher premiums on the back of growth in new business, renewal premium change as well as solid retention. The company’s investment results are likely to improve based on the rising interest rates and a possibility of higher limited partnership returns as well as stable fixed income returns. Also, a lower tax incidence might aid the company’s bottom line. (Read more: Can Higher Premiums Drive CNA Financial's Q3 Earnings?)
The Zacks Consensus Estimate of $1.13 earnings per share during the third quarter represents a 94.8% year-over-year surge. The company’s Zacks Rank #2 (Buy) and an Earnings ESP of +4.19% make us reasonably confident of a probable earnings beat.
It boasts a stellar earnings history, having topped estimates in the preceding four reported quarters, the average being 44.41%. The same is depicted in the chart below:
CNA Financial Corporation Price and EPS Surprise
The Zacks Consensus Estimate for Kemper Corporation’s (KMPR - Free Report) third-quarter earnings is pegged at $1.20 per share, depicting a 69.6% year-over-year improvement. The company’s Zacks Rank #4 (Sell), which lowers the predictive power of ESP, along with an Earnings ESP of 0.00% makes surprise prediction difficult.
The company flaunts a commendable surprise record, having outshined estimates in the previous four reported quarters, the average positive surprise being 90.78%. The same is depicted in the chart below:
Kemper Corporation Price and EPS Surprise
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>