The third-quarter earnings season is gaining pace with 87 members of the elite S&P 500 index having already reported quarterly numbers so far. Per the latest Earnings Preview, the performance of these index members (accounting for 24.7% of the index’s total market capitalization) indicate that total earnings have increased 9.4% on 7.3% higher revenues. The beat ratio is impressive with 71.3% companies surpassing bottom-line expectations and 70.1%, outperforming on the top-line front.
The Finance sector (one of the 16 Zacks sectors) has delivered a strong performance till now. About 50.7% of the sector’s market cap in the S&P 500 index that have reported results so far shows 7.8% earnings growth on 3.3% increase in revenues, both on a year-over-year basis. The beat ratio of 71.4% for the bottom line compared favorably with that of the S&P 500. However, the beat ratio of 50% for the top line is lower than the same of the S&P 500.
Insurance industry, an integral part of the Finance sector, will witness soft results this yet-to-be-reported quarter. A soft performance from the insurance industry will drag the Finance sector’s third-quarter results. Per our Earnings Preview, earnings of the Finance sector will decline 1.5% though revenues will increase 1.1%.
The third quarter witnessed a slew of catastrophes, which will weigh on underwriting profitability as well as the bottom line of insurers. Per the catastrophe modeler AIR Worldwide, the insured loss estimates from Irma could range between $25 billion and $35 billion and between $40 billion and $85 billion from Maria. Moody’s Analytics earlier estimated economic losses from Irma to come in the $58-$83 billion band while that from Harvey could be as high as $108 billion. Mexican tremors have all the more added to the woes.
Though increasing catastrophes will induce fluctuation in underwriting results, we expect prudent underwriting practices and capital reserve piled up on a benign catastrophe environment to withstand the loss to some extent.
We do not expect pricings to have been strong in the third quarter.
However, net investment income, an important component of an insurer’s top line, is likely to witness improvement courtesy three rate hikes approved since December 2016. Though rate environment is improving at a very slower pace, the impact of rate increase is clearly visible in the insurer’s investment results. The third quarter will also not be an exception.
Higher rates should offer some respite to life insurers, which suffered spread compression on products like fixed annuities and universal life due to continuous low rates. Annuity sales should have also benefited from higher rates. However, life insurers have considerably lowered their exposure to interest-sensitive product lines.
With more than 700 companies (180 S&P 500 members) set to report results this week, let’s find out where the following insurers stand before their release of quarterly numbers on Oct 25.
Chubb Limited’s CB third-quarter underwriting results will be affected by a string of cat events. The Zacks Consensus Estimate for combined ratio is currently pegged at 101%, a deterioration of 980 basis points from the year-ago quarter.
Premiums earned likely have reduced the company’s inability to generate enough underwriting returns. The Zacks Consensus Estimate for net premiums earned is currently pegged at $7.2 billion, reflecting a decline of 2.8% on a year-over year basis.
However, higher net investment income and continued share buybacks have likely cushioned the company’s bottom line. The company expects its quarterly investment income run rate to range between $830 million and $840 million.
The Zacks Consensus Estimate of loss is 26 cents per share for the yet-to-be-reported quarter, reflecting a 108.9% year-over-year slump. Chubb currently has a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. Further combined with an Earnings ESP of 0.00%, makes surprise prediction difficult. (Read more: Will Catastrophe Losses Impact Chubb's Q3 Earnings?)
D/B/A Chubb Limited New Price and EPS Surprise
Cincinnati Financial Corporation’s CINF underwriting profitability will be weighed on by catastrophe losses and will render volatility to the earnings. The company estimates between $102 million and $114 million in cat losses in the third quarter, thereby deteriorating the combined ratio by 860-960 basis points.
However, higher premiums earned and investment income likely have driven the top-line growth. The Zacks Consensus Estimate for the third quarter of 2017 is $1.4 billion that represents an increase of 3.5% from the prior-year quarter.
The Zacks Consensus Estimate is pegged at 53 cents for the yet-to-be-reported quarter, down 38.4% year over year. Cincinnati Financial also currently has a bearish Zacks Rank of 4 along with an Earnings ESP of 0.00%. (Read more: Cincinnati Financial Q3 Earnings: Cat Losses to Hurt?)
Cincinnati Financial Corporation Price and EPS Surprise
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The earnings of Marsh & McLennan Companies, Inc. MMC are projected to benefit from increased revenues at its both operating segments, namely, Risk and Insurance Services and Consulting.
A combination of organic and inorganic growth measures is likely to drive revenues in this segment. The Zacks Consensus Estimate for revenues for the segment is $1.6 billion, up 5.8% year over year.
The Zacks Consensus Estimate is pegged at 78 cents for the yet-to-be-reported quarter, up 12.4% year over year. Marsh & McLennan currently has a bullish Zacks Rank #2 (Buy) and combined with an Earnings ESP of -0.53% further, leaves surprise prediction inconclusive this quarter. (Read more: Will Revenue Growth Aid Marsh & McLennan Q3 Earnings?)
Marsh & McLennan Companies, Inc. Price and EPS Surprise
Arthur J. Gallagher & Co’s AJG third quarter is expected to have benefited from a strong performance by its Brokerage and Risk Management businesses.
The top-line growth likely has been fueled by organic sales as well as strategic mergers and acquisitions. The Zacks Consensus Estimate with respect to revenues for the third quarter of 2017 is $1.6 billion, representing an increase of 5.1% from the prior-year quarter.
The insurance broker’s string of strategic buyouts has led it to incur 1 cent per share in integration costs in the soon-to-be-reported quarter.
The Zacks Consensus Estimate is 78 cents for the yet-to-be-reported quarter, reflecting a 1.9% year-over-year increase. Arthur J. Gallagher currently has a Zacks Rank of 4 as well and combined with an Earnings ESP of -1.08% further, makes prediction difficult. (Read more: Arthur J. Gallagher Q3 Earnings: Rising Costs to Hurt?)
Arthur J. Gallagher & Co. Price and EPS Surprise
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