The Finance sector is set to kick off its earnings season this week with major banks reporting quarterly results. Improving rate environment and tax cuts should continue to drive the sector’s performance. Per the Earnings Outlook, earnings for the sector are expected to increase 18.5% on 3.6% higher revenues.
Insurers, an important component of the Finance sector, are shortly going to release their financial numbers. Earnings of the Insurance Industry are envisioned to grow 12.2% in the second quarter, given a slew of tailwinds favoring its operating environment.
Progressing Rate Environment
The second quarter of 2018 marked the second rate hike by the Federal Reserve this year, reflecting a robust economy. The rate now stands at 2% with the regulatory body’s intentions of two more raises in 2018 followed by three in 2019 as well as a couple of in 2020.
A Benign Cat Environment
Although the second quarter escaped the harsh lashes of Mother Nature, a few cat events like rain storms in the United States and Canada still plagued the period. A Morgan Stanley analyst estimates global insured cat loss of about $7.1 billion in the quarter under discussion. The analyst also noted that the count is much lower than the general tally of around $14 billion insurers having suffered natural calamities in any given second quarter.
However, price hikes, prudent underwriting practices, portfolio repositioning and adherence to reinsurance covers will help insurers withstand the deficits.
Also, lower cat loss means lower claims, which in turn, strengthens reserves. The insurance industry is already boasting an all-time sturdy capital position.
While surplus capital is lending a cushion to more capital deployment in growth initiatives, mergers and acquisitions plus shareholder value addition, the same is also responsible for restricting the desired pricing. A Morgan Stanley analyst noted that Jun 1 renewals witnessed an average 1% increase, which is lower than expected.
Tax Reforms and Capital Deployment
Per the implementation of the new tax rate effective first quarter, the tax incidence has been lowered to 21% from 35%. Not only will this aid in margin expansion but also increase dividend payouts owing to rise in net profit available to shareholders.
W.R. Berkley Corporation approved a 7.1% raise in dividends as well as a special cash dividend of 50 cents per share. Chubb Limited announced a 3% hike in quarterly dividend to 73 cents per share. Unum Group too enhanced its quarterly dividend by 13% and approved a new $750-million share buyback program.
Promising Economic Numbers
Job growth has been solid through the second quarter of 2018 with an average of nearly 0.211 million. Unemployment rate in June was 4%.
Per Trading Economics global macro models and analysts expectations, the GDP growth rate for the quarter is estimated at 2%.
The Insurance industry has underperformed the S&P 500 index during the second quarter. While the industry has decreased 5.3%, the elite index has gained 3.8%.
Riding high on tailwinds, insurers enjoyed a favorable operational backdrop to generate improved results. With the help of our Zacks Stock Screener, we identified stocks poised to outshine the Zacks Consensus Estimate in the second quarter. Our proven model conclusively states that because of an ideal combination of the two ingredients — a positive Earnings ESP and a favorable Zacks Rank — the following stocks are likely to surpass expectations at their earnings announcement. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..
The Progressive Corporation (PGR – Free Report) provides personal and commercial auto insurance, residential property insurance plus other specialty property-casualty insurance and related services, primarily in the United States.
Zacks Rank #3 (Hold)
Earnings ESP: +11.34%
Average four-quarter positive surprise: 47.42%
The consensus estimate of $1.69 for 2018 earnings is projected to jump 22.5% year over year in Q2.
Value Score of A
The Travelers Companies, Inc. (TRV – Free Report) provides a range of commercial and personal property as well as casualty insurance products and services to businesses, government units, associations and individuals in the United states and internationally.
Zacks Rank of 3
Earnings ESP: +3.85%
Average four-quarter earnings surprise: 43.50%
The consensus mark of $2.44 is expected to rise 27.1% year over year in Q2.
VGM Score of B
CNO Financial Group, Inc. (CNO – Free Report) develops, markets and administers health insurance, annuity, individual life insurance and other insurance products for senior as well as middle-income markets in the United States.
Manulife Financial Corp. (MFC – Free Report) provides financial advice, insurance besides wealth and asset management solutions for individuals, groups and institutions in Asia, Canada and the United States.
A Zacks #3 Ranked stock
Earnings ESP: +0.50%
Average four-quarter beat: 2.46%
The Zacks Consensus Estimate of 50 cents for current-year earnings witnesses a forecast of 19.1% year-over-year growth in Q2.
VGM Score of A
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