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Insurance Stocks' Earnings Due on Jan 31: AFL, MMC & More

Zacks Equity Research

In the to-be-reported quarter, the insurance industry is expected to showcase an increase in revenues driven by higher premium and investment income.

This upside will be partly offset by high weather-related losses and rise in expenses. Also, share buybacks made to utilize excess capital levels should provide an extra cushion to the bottom line.  

Given below are the major influences this time around.

Increase in Fed Funds Rate Hike to Aid Investment Income

An important component of insurers’ revenues is net investment income, which is largely 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 hike at the December FOMC meeting, the interest rate now stands at 2.50%.

Given a rising rate environment, insurer's investment income should gain from an increase in investment yields.

Higher Pricing to Buoy Premiums

Per InsuranceNewsNet findings, Commercial insurance (which accounts for about half of U.S. property/casualty insurance industry premium) prices in the United States increased nearly 2% year over year, during the fourth quarter of 2018. This marked the fourth consecutive quarter of price hike.  
Per the findings, all business lines, other than Workers’ Compensation saw price increase in the range of 1-3%. Workers’ Compensation was down 1.5% in the fourth quarter.

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

The rate increase in response to catastrophe loss sustained in recent years, helped players to recover losses across the affected insurance lines. This is, however, a welcome development after the industry saw soft market conditions in three years prior to 2017. Better pricing should therefore help insurers’ revenue growth.

Margins to Gain From Low Taxes, Disciplined Capital Deployment

A lower level of tax incidence, courtesy of the new tax rate effective first-quarter 2018, has been boosting margins of companies. This will not only aid margin expansion, but also lead to dividend payouts owing to higher net profit available to shareholders.

Also, the insurance industry boasts an all-time high capital level, helping it to pursue strategic mergers and acquisitions.

Catastrophe Loses to Drain Underwriting Profitability

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 on 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.

Let’s take a look at how the following insurers — lined up for fourth-quarter earnings release on Jan 31, 2019 — are placed.

Marsh & McLennan Companies, Inc.’s MMC impending results are likely to suffer due to weak performances by its Oliver Wyman and Guy Carpenter units.

The Zacks Consensus Estimate for net operating revenues in the to-be-reported quarter is pegged at $3.7 billion, reflecting 0.9% year-over-year growth. The Zacks Consensus Estimate for fourth-quarter earnings is pegged at $1.03, down 1.9% year over year.

The Risk and Insurance Services segment has likely suffered in the quarter under review due to Guy Carpenter. The consensus estimate for this segment’s revenues stands at $1.9 billion, down 0.7% year over year.

However, its Marsh unit is likely to contribute to its overall revenues, evident from the consensus mark of $1.8 billion, up 6.1% year over year. The company’s constant efforts in alliances and acquisitions poise the segment well for growth.

Though Marsh &McLennan carries a Zacks Rank of 3 (Hold), its Earnings ESP of -1.33%, makes our surprise prediction difficult. (Read more: What's in Store for Marsh & McLennan Q4 Earnings?).

The company beat earnings estimates in three of the last four reported quarters at an average of 4.95%. The same is depicted in the chart below:

Marsh & McLennan Companies, Inc. Price and EPS Surprise

Marsh & McLennan Companies, Inc. Price and EPS Surprise | Marsh & McLennan Companies, Inc. Quote

Aflac Incorporated AFL is expected to report higher contribution from its Japan business, which is gaining ground after suffering (till the recent past) from near zero interest rates in the region. The company’s strategy to work on a change in business mix through efforts to deemphasize sales of first-sector (life insurance) products in Japan and promote sales of third-sector products that are less interest sensitive, has actually paid off. Sales in Japan should gain from a cancer product introduced recently.

For the fourth quarter, management expects third-sector new sales growth for the year to be in low single digits. For 2018, the company anticipates that in its Japan business, third-sector earned premium will continue its steady growth in the 2% to 3% range, reflecting Aflac's stable sales and high persistency.

We expect to see continued strength in the profitability of Aflac U.S. led by the ongoing investment in this business, delivery of value-added services and increased client retention, product partnering to drive improved account values and employee access, and investment in administrative capabilities.

Though Aflac carries a Zacks Rank #2 (Buy), its Earnings ESP of 0.00% leaves our surprise prediction inconclusive. (Read more: Aflac to Report Q4 Earnings: What's in the Cards?).

You can see the complete list of today’s Zacks #1 Rank stocks here.

The company beat earnings estimates in each of the last four reported quarters at an average of 6.18%. The same is depicted in the chart below:

Aflac Incorporated Price and EPS Surprise

Aflac Incorporated Price and EPS Surprise | Aflac Incorporated Quote

Arthur J. Gallagher & Co. AJG is likely to display top-line growth in the soon-to-be-reported quarter, mainly driven by organic sales as well as strategic mergers and acquisitions. Also, a probable revenue improvement, primarily across the segments of Brokerage and Risk Management, is likely to contribute to this anticipated upside. The Zacks Consensus Estimate for revenues is pegged at $1.6 billion, representing a 0.6% rise from the prior-year quarter.

The company expects stronger organic growth at its Brokerage segment in the period to be reported, aided by strong growth across all divisions. An expected increase in fees, commissions and supplemental plus contingent revenues has likely supported this uptrend. In fact, the Zacks Consensus Estimate for this segment’s revenues stands at $1 billion, reflecting a 0.3% increase from the year-ago quarter.

Arthur J. Gallagher’s Zacks Rank #3 along with its Earnings ESP of +3.42% increases the predictive power of ESP. (Read more: Is a Beat Likely for Arthur J. Gallagher Q4 Earnings?)

The company beat earnings estimates in three of the last four reported quarters at an average of 2.82%. The same is depicted in the chart below:

Arthur J. Gallagher & Co. Price and EPS Surprise

Arthur J. Gallagher & Co. Price and EPS Surprise | Arthur J. Gallagher & Co. Quote

Selective Insurance Group, Inc. SIGI is a regional insurance holding company which, through its insurance subsidiaries, offers a broad range of property and casualty insurance products.

The company is expected to post quarterly earnings of $0.94 per share in its upcoming report, representing year-over-year growth of 9.3%.
Revenues are expected to be $661.70 million, up 10.9% from the year-ago quarter.

However, the company’s Zacks Rank #3 along with Earnings ESP of 0.00%, makes it difficult to conclusively predict that the company will beat the consensus EPS estimate.

The company has surpassed earnings estimates in each of the last four reported quarters at an average of 8.61%. The same is depicted in the chart below:

Selective Insurance Group, Inc. Price and EPS Surprise

Selective Insurance Group, Inc. Price and EPS Surprise | Selective Insurance Group, Inc. Quote

Zacks' Top 10 Stocks for 2019

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Aflac Incorporated (AFL) : Free Stock Analysis Report
 
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