The fourth-quarter earnings season is in full swing with 251 members of the elite S&P 500 index having already reported financial numbers so far. Per the latest Earnings Preview, performances indicate a 16% increase in total earnings on 10.5% higher revenues. The beat ratio is impressive with 80.5% companies surpassing bottom-line expectations and 64.9%, outperforming on the top-line front.
On an encouraging note, the Finance sector (one of the 16 Zacks sectors) has delivered a strong performance till now.
Per the Earnings Preview, earnings are expected to grow 5.7% on 2.8% higher revenues.
The insurance industry as an integral component of the Finance sector is likely to perform slightly better in the soon-to-be-reported quarter compared with the third. However, the insurers’ underwriting profitability is still likely to bear the brunt of the California wildfires in the fourth quarter. This downside further added to the woes with the catastrophe modeling firm AIR Worldwide estimating cat loss at approximately $10.5 billion.
However, such a massive loss led insures to brave the price hike that remained flat due to a not-so-active catastrophe environment. This in turn has even helped improving the premiums and driving the top line as well.
Also, prudent underwriting practices aided insurers to weather the cat event.
Net investment income, an important ingredient of an insurer’s top line, is expected to have substantially improved on the back of a rising interest rate environment. Although the interest rates have been increasing at a slower pace, the impact of rate hike is clearly visible in the insurers’ investment portfolios. Notably, the Fed kept its promise of three hikes in 2017, the last one made in December, having raised enough optimism among investors.
Diverse product offerings, a wide geographical footprint and strong client retention are anticipated to have enhanced insurers’ performance in the quarter to be reported.
Moreover, the tax reform policy — enacted in December 2017 reducing the tax rate to 21% from 35% — is expected to benefit the insurance industry to a considerable extent. A lower tax rate would aid the companies’ bottom line, boosting margins directly. Additionally, the tax cut is estimated to make U.S. insurers more competitive, globally.
With 482 companies (92 S&P 500 members) set to announce earnings results this week, let’s find out how the following insurers are placed ahead of quarterly releases on Feb 7.
Stocks to Consider
The Allstate Corporation’s ALL fourth-quarter results are likely to be impacted by catastrophe loss, stemming from the California wildfires. This will not only put a dent in the company’s underwriting performance but also render volatility to the company’s bottom line. Notably, the property and casualty (P&C) insurer expects to incur a loss of $516 million from the California wildfires.
Nonetheless, the results are anticipated to gain from a decline in the frequency of auto accidents and improved profitability in auto insurance, reflecting the profit improvement actions initiated in 2015.
Further, on the back of an improving interest rate environment, the company is likely to have witnessed investment income growth in the soon-to-be-reported quarter.
The Zacks Consensus Estimate for earnings of $1.57 per share for the yet-to-be-reported quarter reflects a 27.6% year-over-year decline. Allstate carries a favorable Zacks Rank #2 (Buy), which increases the predictive power of ESP. However, combined with an Earnings ESP of -8.28% leaves surprise prediction inconclusive as the company needs a positive ESP to be confident about an earnings surprise.
You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
(Read More: Will California Wildfires Hurt Allstate Q4 Earnings?)
Cincinnati Financial Corporation’s CINF fourth-quarter results might take a beating by the occurrence of Hurricane Nate and the California wildfires during the period to be reported. This might also affect the underwriting profitability and leave an impact on the combined ratio.
Notably, the property and casualty (P&C) insurer has projected a loss of not less than $1 million in each of the aforementioned catastrophe events.
Nonetheless, Cincinnati Financial is likely to report top-line growth in the fourth quarter, fueled by higher premiums earned. This apart, a gradual improvement in insurance rates and several growth initiatives might have contributed to the possible upside.
On the back of a progressing interest rate environment, the company’s net investment income is predicted to have significantly increased in the quarter to be soon reported. Also, investment results probably have risen on both higher interest and dividend income.
The Zacks Consensus Estimate for earnings of 86 cents per share for the yet-to-be-reported quarter represents a 14.7% year-over-year improvement. Cincinnati Financial holds a Zacks Rank #2, which increases the predictive power of ESP. However, when combined with an Earnings ESP of -2.92%, surprise prediction is left inconclusive. For a company needs a positive ESP to be confident about an earnings surprise.
Prudential Financial, Inc. PRU is likely to have witnessed bottom-line growth in the soon-to-be-reported quarter owing to expanded product offerings and broader distribution capabilities. To top it all, share buyback is expected to have added to the bottom-line upside.
Moreover, the company might experience favorable results at its U.S. Retirement Solutions and Investment Management segment, driven by its penetration and leadership in the pension risk transfer business. Additionally, on the back of higher Asset Management fees, the company might have witnessed growth in asset under management (AUM) in the yet-to-be-reported quarter.
Further, the company has possibly benefitted from a gradually improving interest rate environment, favoring investment income from higher invested asset balances.
However, rise in expenses is likely to have weighed on the desired margin expansion, hurting the company’s overall performance in turn.
The Zacks Consensus Estimate for the company’s bottom line is pegged at $2.60 for the soon-to-be-reported quarter, up 5.7% year over year. Prudential Financial has an Earnings ESP of +0.87% and a favorable Zacks Rank of 2. Such a right combination of the two key elements makes us confident of an earnings beat. (Read More: Prudential Financial Q4 Earnings: Is a Beat in Store?)
Torchmark Corporation TMK has possibly witnessed a noticeable improvement in premiums at its Life Insurance segment, backed by better-than-expected results at American Income Exclusive Agency.
Further, the life insurer’s premium is expected to have grown at its Health segment with the consensus mark pegged at $244 million, thereby reflecting a 2.5% rise year over year. As a result, Torchmark’s total premium might have increased, riding on a favorable performance at both its Life Insurance and Health segments.
On the back of an improving interest rate environment, the company is anticipated to have reported higher excess investment income in the quarter yet to be reported.
However, higher administrative expenses have been forecast to weigh on the insurance underwriting income in the to-be-reported quarter.
The Zacks Consensus Estimate for the company’s earnings is pegged at $1.23 for the soon-to-be-reported quarter, up 6% year over year. Torchmark has an Earnings ESP of +0.33% and the company is a Zacks #2 Ranked player. Such an ideal combination of the two key ingredients makes us confident of an earnings beat. (Read More: Will Higher Premiums Drive Torchmark’s Q4 Earnings?)
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Torchmark Corporation (TMK): Free Stock Analysis Report
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