This week will see the majority of S&P 500 companies reporting their quarterly results. As of April 21, about 95 of the companies from the elite group already reported their earnings.
Let’s see how the life and non-life or property and casualty (P&C) insurance firms are likely to fare this time.
The first-quarter benefited from the positive impact of a slight increase in interest rates favoring insurers’ investment results and performance of life insurers. Also, a benign cat environment favored underwriting results.
Though the first quarter was relatively unaffected by natural calamities, it had to bear the brunt of storms in Midwest and the South during Feb 28 and Mar 22.
This is expected to weigh on underwriting results. Cincinnati Financial Corporation (NASDAQ:CINF) announced pre-tax catastrophe loss of about $106 million for the first quarter. The company expects the metric to deteriorate combined ratio by 920 basis points (bps) and estimates combined ratio between 99% and 101%.
However, prudent underwriting practices have helped insurers mitigate cat losses. A somewhat agreeable cat environment also points to positive reserve development, in turn strengthening capital position.
The Federal Reserve raised interest rates, albeit at a slower rate, for two consecutive quarters (Dec 2016 and Mar 2017). This indicates a stabilizing economy, improving employment and inflation reaching 2%. Investment income, which is a major component of insurers’ top line, is likely to have improved. A broader invested asset base and alternative asset classes are other positives.
Improving interest rates offer some respite to life insurers that suffered spread compression on products like fixed annuities and universal life due to persistently low rates. Investment yield is also likely to have improved. Annuity sales too should have benefited from higher rates.
Also, the improving economy means more disposable income and better consumer sentiment. This, in turn, is likely to have supported more policy writings, driving premiums higher.
A benign cat environment means lower claims payment, leaving surplus capital at the disposal of insurers. These companies are deploying the capital effectively in share buybacks as well as strategic merger and acquisitions.
Given such strong positives, investors can bet on stocks that are poised to deliver positive earnings surprises in their upcoming reports.
Ways to Pick the Right Insurance Stocks
Picking the right stock for your portfolio from too many participants could be difficult. However, an easy way to narrow down the list is to look at stocks with a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Earnings ESP is our proprietary methodology for determining stocks with the best chance of surprising with their next earnings announcement. It shows the percentage difference between
the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The combination of a favorable Zacks Rank and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
For investors seeking to apply this strategy to their portfolio, we have highlighted four insurance stocks that might stand out with an earnings beat in their releases…
Chubb Ltd (CB)
Zurich, Switzerland-based Chubb Ltd (NYSE:CB) is one of the world’s largest providers of P&C insurance and reinsurance. It offers specialized insurance products, such as personal accident, supplemental health and life insurance, to individuals in select countries.
With a Zacks Rank #3 and an Earnings ESP of +0.82%, Chubb looks well poised for a positive surprise. The Zacks Consensus Estimate for the first quarter is pegged at $2.43 per share. With respect to the surprise trend, the company surpassed expectations in three of the last four quarters, with an average beat of 5.95%.
Chubb will announce first-quarter results after the closing bell on Apr 25.
Selective Insurance Group (SIGI)
Headquartered in Branchville, NJ, Selective Insurance Group (NASDAQ:SIGI) provides insurance products and services in the U.S.
With a Zacks Rank #2 and an Earnings ESP of +9.59%, Selective Insurance is set to deliver another quarter of positive surprise. The Zacks Consensus Estimate for the first quarter is 73 cents per share. The company outperformed expectations in two of the last four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
Selective Insurance is scheduled to announce first-quarter results after the closing bell on Apr 26.
Reinsurance Group of America Inc (RGA)
Timberlake, MO, Reinsurance Group of America Inc (NYSE:RGA) engaged in traditional individual and group life, asset-intensive, critical illness and financial reinsurance.
Reinsurance Group has a Zacks Rank #2 and an Earnings ESP of +1.42%. The Zacks Consensus Estimate for the first quarter is pegged at $2.11 per share. The company outperformed expectations in three one of the last four quarters with an average beat of 6.40%.
Reinsurance Group will announce first-quarter results after the closing bell on Apr 27.
Arthur J Gallagher & Co (AJG)
Headquartered in Itasca, IL, Arthur J Gallagher & Co (NYSE:AJG) provides insurance brokerage and consulting services and third-party claims settlement and administration services in the U.S. and internationally.
With a Zacks Rank #3 and an Earnings ESP of +2.56%, Arthur J. Gallagher looks well poised for a positive surprise. The Zacks Consensus Estimate for the first quarter is 39 cents per share. The company outperformed expectations in three of the last four quarters with an average beat of 4.90%.
Arthur J. Gallagher is scheduled to announce first-quarter results after the closing bell on Apr 27.
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