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AON, CI Q4 Earnings Due on Feb 1: Here are Key Predictions

Zacks Equity Research

In the fourth quarter of 2018, sustained economic growth, high interest rates, higher premiums and rising investment income are some of the positive factors that will bolster growth for the insurance industry, setting the stage for better top-line and bottom-line growth.

Apart from the aforementioned factors, capital deployment through share repurchase by the insurance players should provide an extra cushion to the bottom lines.

So, here are a few major factors that influenced the insurance industry of late.

A Better Economy

A thriving global economic scenario, backed by solid customer retention, constant mergers and acquisitions and rising insured exposure, continues to be one of the primary drivers behind this industry’s growth. A strengthening economy in fourth-quarter 2018, banking on low unemployment level, improving wages and a growing GDP should drive demand for coverages from these companies.

Increase in Interest Rates to Aid Investment Income

Net investment income contributes to a lion’s share of insurers’ revenues, which in turn, is dependent on federal interest rates.

The Central Bank made four rate hikes in 2018, reflecting economic progress, a strong labor market and 2% inflation as targeted by the Fed. With the one-quarter percentage point raise at the December FOMC meeting, the interest rate now stands at 2.50%.

Given a rising rate environment, insurers' investment income should gain from higher investment yields.

Data and Analytics

The use of data and analytics plus investment in technology is allowing the industry players to serve the growing customer needs. Adoption of advanced technology such as AI (artificial intelligence), robotic process automation, cognitive intelligence or blockchain and cloud computing has reshaped the way insurers do business and cater to the evolving customer expectations via a data-driven approach that gives them a better understanding of the customer mindset.

The capabilities have provided them with a more customer-centric approach and also helped them differentiate themselves in the market. In the fourth quarter, the companies are likely to have enjoyed higher premiums owing to heavy investments in the technological platform, which increase operating efficiency.

Elevated Costs

Although investment in technology has helped insurers generate robust revenues and live up to evolving customer demand, the related expenses have kept the operating costs exorbitant for quite some time. Also, many players are suffering due to high debt levels on account of their inorganic growth initiatives. Thus, interest expenses are expected to remain high as of now.

Pricing

Rise in premium rates should aid insurer’s top line. Per InsuranceNewsNet findings, Commercial insurance (accounting for about half of U.S. property/casualty insurance industry premium) prices in the United States inched up nearly 2% year over year during the fourth quarter of 2018. This marked the fourth consecutive quarter of price hike. 

Per the statistics, all business lines, other than Workers’ Compensation, saw a price increase in the range of 1-3%. Workers’ Compensation slid 1.5% in the fourth quarter.

Another major insurance line, the Personal Lines, witnessed average increase of 2.25% in the fourth quarter of 2018. Among the sub business lines, Homeowners rates in fourth-quarter 2018 are stable at plus 3% for homes under $1,000,000 and at plus 2% for homes above $1,000,000. Automobile rates were down slightly while  personal articles rates were marginally up, both moving 0.5%.

Catastrophe Loss to Drain Underwriting Profitability

The insurance industry’s exposure to catastrophe events is anticipated to have affected the margins in the fourth quarter of 2018 due to California wildfires. Also, Hurricane Michael is expected to take a toll on insurers’ fourth-quarter profits. Per 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. Going by the reports of Florida Office of Insurance Regulation, Hurricane Michael is forecast to cause about $4.3 billion insured loss.

Now let’s take a look at how the following insurance players are placed before fourth-quarter earnings release on Feb 1.

Aon plc AON is likely to have suffered from escalated expenses due to organic and inorganic investments in the fourth quarter. The company is likely to endure a high financial leverage, which has been rising since 2014 due to a high commercial paper outstanding. The Reinsurance segment’s revenues are also likely to decline as even the metric’s Zacks Consensus Estimate is pegged at a 57% year-over-year plunge.

Nevertheless, the company’s constant efforts for strategic investments in expand its portfolio along with productivity improvement measures are expected to contribute to its revenues. The Zacks Consensus Estimate for fourth-quarter total revenues stands at $2830 million, down 2.7% year over year.

Moreover, owing to Aon’s consistent investments in data and analytics, we expect revenues from Data & Analytics services to be around $311 million, up 4.4% from the year-ago quarter.

The Zacks Consensus Estimate for Commercial Risk Solutions segment’s revenues for the fourth quarter also indicates a rise of 7.2% from the prior-year level. This is likely to be supported by growth across major geographies and management of renewal book portfolio along with double-digit growth in the United States and Latin America.

Though Aon carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP, its Earnings ESP of -0.39% leaves surprise prediction inconclusive as the company also needs a positive ESP to be confident about a likely earnings surprise. (Read More: Aon  to Report Q4 Earnings: What's in the Offing?) You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, the company has managed to come up with a positive surprise in the trailing four reported quarters, the average being 4.57%. The same is depicted in the chart below:

Aon plc Price and EPS Surprise

Aon plc Price and EPS Surprise | Aon plc Quote

Cigna Corp.’s CI fourth-quarter results are most likely to mirror substantial revenues and earnings growth along with strength across each of the business segments. Its Global Health Care’s revenues are likely to bump up on the back of commercial customer growth, better premiums and the expansion of specialty relationships. Membership strength will likely be led by higher enrollment in Select, Middle Market and Individual segments.

The company’s Supplemental Benefits business revenues should gain traction from consistent innovation in product design and distribution strategies coupled with a firm business footing in targeted markets.

Group Disability and Life business should see sturdy contribution from solid performance in both disability and life businesses.   

Cigna has a Zacks Rank # 2(Buy) and an Earnings ESP of +0.28%, which makes us confident of its likely positive surprise in the to-be-reported quarter. (Read More: Cigna Poised to Beat Q4 Earnings on Revenue Growth) You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

The boasts an impressive earnings surprise history, having surpassed estimates in each of the last four reported quarters, the average being 13.46%. The same is depicted in the chart below:

Cigna Corporation Price and EPS Surprise

Cigna Corporation Price and EPS Surprise | Cigna Corporation Quote

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