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Insurers Q3 Earnings to Watch on Oct 24: AFL, TMK, UNM, MKL

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The third-quarter earnings season is fast unfolding, with 84 S&P 500 companies (collectively accounting for 22.3% of the index’s total market capitalization) having reported their quarterly numbers already as of Oct 19.

Per the latest Earnings Preview, total earnings of these 84 companies increased 19.2% from the same period last year on 8.4% higher revenues, with 82.1% beating EPS estimates and 61.9% beating revenue estimates.
The proportion of these companies beating both EPS and revenue estimates is 54.8%.

Further, for the third quarter, as a whole, earnings of the finance sector, which includes insurer companies too, are expected to be up 54.1% on 6.8% higher revenues.

Insurers are expected to deliver better numbers though catastrophe loss could weigh on their earnings results for the third quarter.

Rate Hike to Aid Investment Income

An important component of insurers’ revenues is net investment income. Insurers, by the nature of their operations, are mandated to invest a big chunk of the premiums collected to able to provide funds at the time of claims or upon maturity (in case of life insurance). This investment income is largely dependent on federal interest rates. Given that the Central Bank has hiked the rate for the third time this year, insurers should gain from increase in yields on their investment income.

Premium to Jack up From Higher Pricing

Due to a benign catastrophe environment, insurers witnessed 19 back-to-back quarters of soft pricing market. However, following last year’s destruction, insurers started to raise prices from the fourth quarter of 2017.

Per insurancenetnews, in the United States, the composite rate in the third quarter of 2018 increased 2.5%, matching the rate increase of the second quarter. However, the magnitude of price gains was uneven for different business lines. For instance, trucking and commercial auto saw rate increases of more than 6%. Property and business interruption coverages were down 1% sequentially. General liability rates increased in the range of 1% and 3%. The only rate decrease remained with workers’ compensation as rates declined on average by 3% in the third quarter, matching the decrease of the second quarter.

Margins to Gain from Low Taxes and 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 in turn, 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.

Though the third quarter of 2018 was not as devastating as the year-ago quarter, the period still bore the brunt of Hurricane Florence.  

Hurricane Florence Denting Underwriting Results

Catastrophe modeler Risk Management Solutions expects cat loss between $15 million and $20 billion, stemming from Hurricane Florence. Also, Citigroup analysts estimated Travelers to incur losses of roughly $42 million for each $1 billion in insured followed loss of $37 million by Allstate, $25 million by Chubb and $21 million by Progressive as these companies have large exposure in North Carolina where Florence made a landfall last month.

Let’s find out where the following insurers stand ahead of their third-quarter releases on Oct 24.

Aflac Inc. AFL is expected to benefit from a healthy sales pipeline in its U.S. segment, strong sales growth in third-sector products in Japan and share buyback.

We expect to see strong financial performance and 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.

Aflac’s Japan business is also gaining ground after suffering (till the recent past) from near zero interest rates in the region.

Aflac carries a Zacks Rank #4 (Sell) and has an Earnings ESP of -0.10%. We caution against the Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions. (Read more: Aflac to Report Q3 Earnings: Will It Beat Estimates?)

Nevertheless, the company boasts an attractive earnings surprise history, having surpassed estimates in each of the trailing four quarters, with an average positive surprise of 7.17%. This is depicted in the chart below:

Aflac Incorporated Price and Consensus

Aflac Incorporated Price and Consensus | Aflac Incorporated Quote

Torchmark Corporation TMK is likely to see noticeable improvement in premiums at its Life Insurance segment owing to better-than-expected performance across American Income Agency, Global Life Direct Response and LNL Agency.

Additionally, the life insurer is expected to display premium growth at its Health segment with the consensus mark pegged at $251 million, reflecting a 3.3% rise year over year.

On the back of improving interest rates and higher new money rates, the company is anticipated to report higher excess investment income in the yet-to-be-reported quarter.

Torchmark carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +0.44%, which makes us confident of a likely positive surprise. (Read more: Can Stronger Premiums Drive Torchmark's Q3 Earnings?)

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

The company beat earnings estimates in each the last four reported quarters at an average of 1.68%. The same is depicted in the chart below:

Torchmark Corporation Price and Consensus

Torchmark Corporation Price and Consensus | Torchmark Corporation Quote

Unum Group UNM is estimated to witness bottom-line growth in the yet-to-be-reported quarter, driven by consistent favorable operating trends, a strong premium rise across the core business lines plus share buybacks. A lower tax rate has also contributed to this probable upside.

Riding on improving interest rates, the company might have experienced better investment results in the third quarter.

Though the company is Zacks #2 Ranked, its Earnings ESP of -0.27% makes surprise prediction difficult. (Read more: Can Unum U.S.' Strength Drive Unum Group Q3 Earnings?)

The company beat earnings estimates in three of the last four reported quarters, with an average positive surprise of 2.75%. The same is depicted in the chart below:

Unum Group Price and Consensus

Unum Group Price and Consensus | Unum Group Quote

Markel Corporation MKL markets and underwrites specialty insurance products and programs to a variety of niche markets.

Though the company sports a Zacks Rank #1, its Earnings ESP of -3.04% makes surprise prediction difficult.

The company beat earnings estimates in two of the last four reported quarters, with an average positive surprise of 34.72%. The same is depicted in the chart below:

Markel Corporation Price and Consensus

Markel Corporation Price and Consensus | Markel Corporation Quote

 

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