The Finance sector is set to report financial numbers from next week. Per the Earnings Outlook, Finance is one of the seven Zacks sectors likely to deliver double-digit earnings growth. Earnings for the sector are expected to increase 19.6% on 3.5% higher revenues. While a drop in tax rate is expected to boost earnings, revenues are likely to reflect weak loan growth and softness in trading volumes, partially offset by improved margins owing to an improving rate environment.
Integral to the Finance sector, insurers are expected to deliver better numbers. However, catastrophe loss could weigh on their earnings.
Improving Rate Environment
The Central Bank made four rate hikes in 2018, reflecting economic progress, strong labor market and inflation of the Fed’s 2% target. With the one-quarter percentage point hike at the December FOMC meeting, the interest rate now stands at 2.50%.
Given a rising rate environment, investment income — an important component of insurers’ top line — should continue to trend up.
Strong Labor Market
An average of 0.3 million increase in jobs has been reported over the past three months. Per U.S. Bureau of Labor Statistics, unemployment rate was 2.9% in December while yearly wage growth was 3.2%.
Tax Reforms and Capital Deployment
A lower level of tax incidence, courtesy of implementation of the new tax rate, effective first-quarter 2018 has been boosting earnings of the companies. This, in turn, will not only aid margin expansion but also lead to higher dividend payouts owing to higher net profit.
Also, the insurance industry boasts a sturdy capital level, helping it pursue strategic mergers and acquisitions.
California Wildfires Likely to Dent Underwriting Results
California wildfires destroyed thousands of residential and commercial properties in the fourth quarter of 2018. Apart from California wildfire, Hurricane Michael is also expected to take a toll on insurers’ fourth-quarter profits. According to a report published in Insurance Journal on Dec 12, 2018, insured losses from the California wildfire came in at $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.
Insurers AXIS Capital Holdings Limited (AXS) estimated pre-tax loss ranging between $125 million and $150 million while Hartford Financial Services Group Inc HIG expects loss in the range of $275-$290 million, post tax. Chubb Limited CB estimates about $225 million pretax or $195 million after tax. Mercury General Corporation (MCY) estimates pre-tax gross catastrophe loss of $253 million, stemming from Camp Fire and Woolsey Fire. RLI Corp. (RLI) anticipates cat loss between $22 million and $27 million, net of reinsurance from Hurricane Michael.
Pricing Firms Up
Industry participants started to raise price from the fourth quarter of 2017, following huge cat losses.
Per Willis Towers Watson plc’s Commercial Lines Insurance Pricing Survey, commercial insurance prices in the United States increased more than 2% in the third quarter of 2018. Per the survey, commercial auto, commercial property, and excess/umbrella liability witnessed price increase. Commercial property witnessed low- to mid-single digit increase for the fourth consecutive quarter. Commercial auto witnessed a double-digit rise for the fourth straight quarter
Nonetheless, workers compensation continues to suffer.
Improved pricing, prudent underwriting practices, portfolio repositioning and reinsurance covers will help insurers weather headwinds.
The Insurance industry fared better than the Zacks S&P 500 composite as well as the Finance sector in the fourth quarter. Though the industry decreased 8.6%, its performance was better than 14% decline of the index and Finance sector’s decline of 11.4%.
With the help of our Zacks Stock Screener, we have identified a few stocks poised to outshine the Zacks Consensus Estimate in the fourth quarter. These stocks have the ideal combination of two ingredients — a positive Earnings ESP and a favorable Zacks Rank — and are likely to surpass expectations. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Also, these stocks have a solid earnings history.
The Progressive Corporation PGR 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 #1
Earnings ESP: +1.20%
Average four-quarter positive surprise: 13.48%
The Zacks Consensus Estimate of $1.02 for the fourth quarter indicates 29.1% year-over-year improvement.
Estimates for 2019 have been revised 1% upward over the past 60 days.
Cigna Corporation CI provides insurance and related products and services in the United States and globally.
Zacks Rank #2
Earnings ESP: +0.48%
Average four-quarter positive surprise: 13.46%
The Zacks Consensus Estimate of $2.51 for the fourth quarter projects 29.4% year-over-year increase.
Earnings estimates for 2019 have been revised 18.7% higher over the past 60 days.
Radian Group Inc. RDN provides mortgage and real-estate products and services in the United States
Zacks Rank #2
Earnings ESP: +3.03%
Average four-quarter positive surprise: 11.33%
The Zacks Consensus Estimate of 66 cents for the fourth quarter indicates year-over-year increase of 29.4%.
Aon plc AON provides risk management services, insurance and reinsurance brokerage, and human resource consulting and outsourcing services worldwide.
Zacks Rank of 3
Earnings ESP: +2.75%
Average four-quarter positive surprise: 4.57%
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Radian Group Inc. (RDN) : Free Stock Analysis Report
Aon plc (AON) : Free Stock Analysis Report
Cigna Corporation (CI) : Free Stock Analysis Report
The Hartford Financial Services Group, Inc. (HIG) : Free Stock Analysis Report
The Progressive Corporation (PGR) : Free Stock Analysis Report
Chubb Limited (CB) : Free Stock Analysis Report
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