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Will Cat Loss Affect CNA Financial's (CNA) Earnings in Q4?

Zacks Equity Research

CNA Financial Corporation CNA is slated to report fourth-quarter 2018 results on Feb 11, before the market opens. In the last reported quarter, the company delivered a positive surprise of 3.54%.

Let’s see, how things are shaping up for this announcement.

CNA Financial is likely to have reported premium growth in the to-be-reported quarter, fueled by a probable increase in new business, renewal premium change and solid retention.

Also, higher premiums across its segments — Commercial, International and Specialty — are expected to drive this upside. Moreover, a strong execution across all production metrics might have contributed to this probable improvement. In fact, the Zacks Consensus Estimate for the metric is pegged at $1.8 billion, reflecting a 1.6% rise from the prior-year period.

Riding on the strength of rising interest rates, possibility of higher limited partnership returns and stable fixed income returns, we anticipate CNA Financial to witness better investment results in the fourth quarter.

On the back of improved premiums and investment results, CNA Financial has possibly experienced top-line growth in the soon-to-be-reported quarter. The Zacks Consensus Estimate for revenues is currently pegged at $2.6 billion, representing a 7% increase from the year-ago quarter.

CNA Financial continues to efficiently manage its long-term care book of business through product claim management, thereby mitigating risk and aiding rate increase.

Being a property and casualty (P&C) insurer, CNA Financial is persistently exposed to unpredictable weather-related events. Consequently, in the fourth quarter, the company is likely to suffer a substantial level of catastrophe loss, stemming from the cat events that occurred during the period. This in turn, might affect the insurer’s combined ratio, thus denting its underwriting performance in the quarter to be reported. In fact, the consensus mark for the combined ratio is pegged at 95%, indicating a deterioration of 100 basis points from the prior-year quarter.

Further, the company has probably incurred higher expenses, primarily due to increasing net claims and benefits plus amortization of deferred acquisition costs. This rise in expenses could restrict the operating margin expansion, hurting the company’s overall profitability in turn.

The impact of catastrophe loss and anticipated higher expenses could weigh on the company’s bottom line in the fourth quarter. In fact, the Zacks Consensus Estimate for earnings stands at 81 cents, reflecting a decline of 22.9% from the year-earlier quarter.

What Our Quantitative Model States

Our proven model does not conclusively show that CNA Financial is likely to beat on earnings this season. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Earnings ESP: CNA Financial has an Earnings ESP of -27.39%. This is because the Most Accurate Estimate is pegged at 59 cents, lower than the Zacks Consensus Estimate of 81 cents. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.  

CNA Financial Corporation Price and EPS Surprise

 

CNA Financial Corporation Price and EPS Surprise | CNA Financial Corporation Quote

Zacks Rank: CNA Financial carries a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. We caution against Sell-rated stocks (4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks worth considering from the finance sector with the perfect mix of elements to outshine estimates this time around are as follows:

Ares Capital Corporation ARCC is set to report fourth-quarter earnings on Feb 12. The company has an Earnings ESP of +1.10% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

AerCap Holdings N.V. AER has an Earnings ESP of +6.84% and a Zacks Rank of 2. The company is scheduled to release fourth-quarter earnings on Feb 14.

Agree Realty Corporation ADC has an Earnings ESP of +0.88% and a Zacks Rank of 3. The company is slated to announce fourth-quarter earnings on Feb 21.

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