4 Reasons Why These P&C Insurers Assure Q3 Earnings Beats

The third-quarter earnings season is well underway with companies across sectors disclosing their financial performances. The mood is quite optimistic in the non-life or the Property and Casualty (P&C) insurance industry.
 
To some extent, the last quarter had faced the brutality of catastrophe. The effect trickled down to the third quarter and is clearly hurting insurers’ performances. Nonetheless, with strong positives guarding the results, investors can bet on stocks that are poised to deliver a positive earnings surprise in their upcoming report. 
 
Before we discuss the best way to pick stocks, let us take a quick look at how the sector fared in the quarter. This clearly points to a positive outlook. Also note that the P&C insurance industry sits perched on the upper 1/3 tier of the Zacks Industry Rank at #52.
 
Catastrophe Events
 
The third quarter experienced catastrophe activities first from an explosion in Tianjin, China on Aug 12, then from an earthquake in Chile on Sep 16. The U.S. weather-related events are also not to be ignored. These are definitely weighing on the profitability of the insurers.
 
AXIS Capital Holdings Ltd (AXS) has already reported catastrophe loss of $43 million in the quarter. XL Group plc (XL) suffered losses, net of reinsurance and reinstatement premiums stemming from Tianjin, China port explosion, of $95.7 million plus natural catastrophe pretax loss, net of reinsurance and reinstatement premiums, of $30.8 million. Among the players that are yet to report, Validus Holdings, Ltd. (VR) and Aspen Insurance Holdings Limited (AHL) estimate catastrophe losses of $63.9 million and $50 million, respectively. 
 
While the incurred loss has affected underwriting results, it hasn’t violently drained out insurers’ capital. As a result, insurers have been able to maintain their sturdy reserves.
 
Interest Rate Environment
 
As no lift-off was initiated by the Federal Reserve in its September meeting, the interest rate environment still remains soft. The near-zero interest rate environment had kept investment results under stress. Though a low interest rate environment is desired by most industries by virtue of the cheap money that it has in tow, insurers stand to lose from the same.
 
This is because investment income plays a major role in their top line. A low rate thus puts pressure on investment income and in turn on investment yields. Nonetheless, a broader invested asset base, alternative asset classes and improving equity market conditions should be breathers. Hence, yields may not be as low as seen during the economic downturn. But at the same time, yields are unlikely to come anywhere near their historical highs.
 
Life insurers suffered spread compression on products like fixed annuities and universal life due to sustained low rates. However, the insurers are bracing up their portfolio either by re-pricing or by expanding capabilities to boost profitability. And how is that coming along?
 
Economic Recovery
 
With surplus in hand, thanks to economic recovery and an improving employment level, people are opting for an insurance coverage. Insurers are capitalizing on this favorable trend by redesigning and re-pricing their products that are in turn driving premiums. Also, insurers are benefitting from emerging risks of cyber threats via increasing premium and policy counts. Additionally, improvement in the real estate market and corporate bonds should tone down credit-related investment losses.
 
Consolidation and Capital Deployment
 
Last but not the least, a mention must be made of the consolidation trend in the industry. The third quarter too saw a series of mergers and acquisitions. The mega ones that grabbed attention were ACE Limited’s (ACE) buyout of The Chubb Corporation (CB), Willis Group Holdings plc (WSH) takeover of Towers Watson (TW) and EXOR S.p.A.’s clinching the PartnerRe Ltd. (PRE) acquisition deal.
 
Consolidations help insurers to insulate themselves against waning premiums, gain a competitive edge, brace up offerings (both by diversification and adding capabilities), and broaden the geographical footprint. Moreover, these testify to their balance sheet strength besides infusing more capital into an already well-capitalized industry.
 
Banking on capital strength, the insurers have also generously deployed capital. A series of dividend hikes, share buyback activities and approval of new repurchase programs were amply seen in the third quarter.
 
Way to Pick the Right Insurance Stocks
 
Picking the right stock for your portfolio from too many participants could be difficult. But an easy way to narrow down the list of choices is to look at the stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) –   and a positive Earnings ESP.
 
Earnings ESP is our proprietary methodology for determining stocks with the best chance of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
The combination of a favorable Zacks Rank and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
 
For investors seeking to apply this strategy to their portfolio, we have highlighted three P&C insurance stocks that might stand out with an earnings beat in their releases next week. 
 
The Allstate Corporation (ALL)
 
Northbrook, IL based The Allstate Corporation is the second-largest property and casualty insurer and the largest publicly held personal lines carrier in the U.S.
 
Allstate has a Zacks Rank #3 and an Earnings ESP of +0.77%. The Zacks Consensus Estimate for the third quarter is pegged at $1.30 per share. The company has outperformed expectations in three of the last four quarters.
 
Allstate will announce third-quarter 2015 results after the closing bell on Nov 2.
 
RenaissanceRe Holdings Ltd. (RNR)
 
Hamilton, Bermuda, RenaissanceRe Holdings Ltd. primarily provides property-catastrophe reinsurance to insurers and reinsurers globally on the basis of excess of loss (coverage of losses over a specified limit). The company provides certain specialty reinsurance coverage on accident, health, aviation and satellite concerns, as well as homeowners' insurance in various parts of the U.S.
 
RenaissanceRe has a Zacks Rank #2 and an Earnings ESP of +1.55%. The Zacks Consensus Estimate for the third quarter stands at $1.93 per share. The company has outperformed expectations in three of the last four quarters, with an average beat of 19.94%.
 
RenaissanceRe will announce third-quarter results after the closing bell on Nov 4.
 
Federated National Holding Company (FNHC)
 
Based in Sunrise Fl, Federated National Holding Company is an insurance holding company, which through its subsidiaries, controls all aspects of the insurance underwriting, distribution and claims processes. The company underwrites homeowners' property and casualty, commercial general liability, commercial residential property, flood, personal automobile and commercial automobile. It is also licensed to and has the facilities to market and underwrite policies for other insurance carriers' lines of business such as, inland marine, workers' compensation and personal umbrella insurance.
 
With a Zacks Rank #1 and an Earnings ESP of +50.00%, Endurance Specialty looks well poised for a positive surprise. The Zacks Consensus Estimate for the third quarter is pegged at 50 cents per share. With respect to the surprise trend, the company surpassed expectations in three of last four quarters, with an average beat of 30.70%.
 
Federated National will announce third-quarter results after the closing bell on Nov 4.
 
Markel Corp. (MKL)
 
Headquartered in Glen Allen, VA, Markel Corporation markets and underwrites specialty insurance products in the United States and internationally.
 
With a Zacks Rank #1 and an Earnings ESP of +1.77%, Markel looks well poised for a positive surprise. The Zacks Consensus Estimate for the third quarter is $6.78 per share. With respect to the surprise trend, the company surpassed expectations for three straight quarters, with an average beat of 63.3%.
 
Markel Corp is expected to announce third-quarter results after the closing bell on Nov 5.

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