Favorable operating backdrop that including interest rate hikes, improved pricing, continued share repurchases, strategic consolidations and lower tax rates should benefit Insurance industry players’ fourth-quarter 2018 results. However, catastrophe events like California wildfires and Hurricane Michael may prove to be a drag on underwriting profitability.
Insurers should continue to benefit from an improving rate environment. Following an accelerated pace of rate hikes, the interest rate currently stands at 2.50%. In fact, on the back of economic improvement, the Fed raised rates in all the four quarters of 2018. Thus, net investment income, which is an important component of insurers’ top line, is likely to improve. Also, insurers should gain from an increase in yields on their investment income.
Pricing plays an important part in recovering losses across the affected insurance lines. Since the fourth quarter of 2017, almost all business lines have been witnessing improved pricing except for Workers’ Compensation and the fourth quarter of 2018 was not an exception either.
Per InsuranceNewsNet findings, Commercial insurance prices in the United States increased nearly 2% year over year in the fourth quarter of 2018. This marked the fourth consecutive quarter of price hike. Workers’ Compensation was down 1.5% in the fourth quarter. Improved pricing drove premium growth.
However, the fourth quarter bore the brunt of Hurricane Michael and California wildfires, which weighed on underwriting profitability and lowered combined ratios. According to a report published in Insurance Journal on Dec 12, insured losses from the California wildfire were $9.05 billion while catastrophe modeler CoreLogic estimated total losses resulting from the wildfires in Northern and Southern California between $15 billion and $19 billion. Per reports from Florida Office of Insurance Regulation, Hurricane Michael is estimated to cause about $4.3 billion in insured losses.
Nonetheless, a lower level of tax incidence, due to lower tax rate, is expected to boost margins. Also, owing to higher net profit available, companies hiked dividend payouts.
The insurance industry boasts a sturdy capital level, which helped it pursue strategic mergers and acquisitions and engage in share buybacks. These activities are expected to boost the bottom line of industry players.
Let’s take a sneak peek at how the following insurers are poised prior to their fourth-quarter earnings reports on Feb 11.
Loews Corporation’s (L - Free Report) continued strong performances at CNA Financial Loews Hotels are likely to aid its fourth-quarter performance. Boardwalk Pipeline is likely to deliver better numbers on the back of growth-enhancing projects. CNA Financial’s efficient management of its long-term care book of business through prudent product claim handling is expected to mitigate risks and enable a rate increase. Operating expenses and interest expense are likely to increase. (Read more: Loews Q4 Earnings: What's in the Cards for the Stock?)
The Zacks Consensus Estimate for earnings per share of 53 cents for the the yet-to-be-reported quarter indicates a 36.1% year-over-year decline. The company has a Zacks Rank #4 (Sell) and its Earnings ESP is 0.00%. According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP.
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The company surpassed estimates in the two of three reported quarters of 2018, with the average surprise being 2.67%. This is depicted in the chart below:
Loews Corporation Price and EPS Surprise
Everest Re Group, Inc.’s (RE - Free Report) Insurance segment is likely to benefit from product diversification, staffing up underwriting operations, global expansion, and international insurance growth. Improved pricing across all business lines is likely to benefit premiums though the same at workers compensation line of business was soft. Accelerated pace of rate hike is expected to boost net investment income. The company estimates cat loss of $695 million, net of reinsurance, reinstatement premiums and taxes. This estimate also includes cat loss from a hailstorm in Australia. In fact reinsurance operations are likely to suffer the most. Everest Re relies on the loss reported by ceding insurers across many underlying insurance policies. (Read more: Everest Re to Report Q4 Earnings: What’s in Store?)
The Zacks Consensus Estimate is pegged at loss of $4.56 for the fourth quarter, indicating a decline of 133.8% year over year. Prudential carries a Zacks Rank of 4 and has an Earnings ESP of -22.59%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company surpassed estimates in the two of three reported quarters of 2018, with the average surprise being 10.40%. This is depicted in the chart below:
Everest Re Group, Ltd. Price and EPS Surprise
Brighthouse Financial, Inc. (BHF - Free Report) is likely to benefit from its compelling portfolio of life and annuity products and strong market presence. Annuity sales are likely to increase on the back of better performance of Shield and fixed indexed annuities. Investment income is likely to benefit from accelerated pace of rate hikes. The company’s focus on placing treasuries into higher-yielding spread assets and growth in average invested assets are likely to drive investment income. Expenses are expected to increase as the company continued its investments. (Read more: Brighthouse Financial Q4 Earnings: What to Expect)
The Zacks Consensus Estimate of $1.74 per share for fourth-quarter earnings per share indicates nearly 370.3% year-over-year increase. The company has a Zacks Rank #4 and an Earnings ESP of -5.53%.
The company surpassed estimates in the two of three reported quarters of 2018 with the average negative surprise being 6.64%. This is depicted in the chart below:
Brighthouse Financial, Inc. Price and EPS Surprise
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