The Finance sector will kick off its earnings season this week with major banks reporting quarterly results. The sector's performance will largely be driven by an improving rate environment, tax cuts, favorable operating environment and better domestic growth scenario. Per the Earnings Preview , earnings for the sector are expected to increase 19.2% on 4.5% higher revenues.
Insurers, an important component of Finance sector, are due to report results starting next week. Earnings of the Insurance industry are estimated to grow 15% in the first quarter, given a number of tailwinds favoring its operating environment. Progressing Rate Environment
Last quarter marked the sixth rate hike by the Federal Reserve testifying economic stability. The rate now stands at 1.75% with intentions of two more raises in 2018 followed by three in 2019 as well as two in 2020. A Benign Cat Environment
The first quarter of 2018 escaped the inclemency of Mother Nature, though there were cat events like California mudslide and northeast winter storms. A Morgan Stanley analyst estimates global insured cat loss in the first quarter between $5 billion and $10 billion.
Nonetheless, insurers having already suffered the rigors of cat loss last year, could manage to weather its first-quarter shortfalls too. Underwriting profitability must have been affected, albeit at a lesser magnitude.
However, price hikes, prudent underwriting practices, portfolio repositioning and resorting to reinsurance covers will help insurers withstand the deficits. Tax Reforms and Capital Deployment
Per the implementation of the new tax rate effective first quarter, the tax incidence has been lowered to 21% from 35%. Not only will this aid in margin expansion but also increase dividend payouts owing to rise in net profit available to shareholders.
Insurers Assured Guaranty Ltd. has already approved a 12% increase in dividend while FBL Financial Group Inc. has approved a special dividend of $1.50 per share, hiking quarterly dividend by 4.5% and authorizing a share repurchase program of $50 million. Horace Mann Educators Corporation hiked quarterly dividend by 3.6%. Promising Economic Numbers
Job growth has been solid through the first three months of 2018 with an average of nearly 0.202 million, better than 0.182 million a year ago.
Unemployment rate in March remained steady at 4.1% for the sixth straight month.
Per Trading Economics global macro models and analysts expectations, the GDP growth rate for the quarter is estimated at 2.9%. Insurance Space Abounds With Consolidation Craze
The last couple of years has set the stage for insurers to adopt an aggressive and positive approach toward the deal-making environment in 2018, mainly driven by an evolving industry and a proactive M&A environment.
Apart from revamping taxation to make U.S. insurers more competitive globally, the tax overhaul provides a few good changes to make the M&A milieu more conducive to the players concerned. Moreover, other catalysts like pricing pressure and divestment of noncore assets have pushed acquirers to vie for a competitive edge in the buyout arena. Also given a continued capital inflow, the insurance industry's available resources remain at an all-time high, helping insurers build a strong liquidity profile.
A few high-profile deals struck in the first quarter are American International Group, Inc.'s AIG
decision to buy reinsurer Validus Holdings, Ltd. for $5.6 billion in cash. AXA Group's 100% acquisition of XL Group Ltd XL
for $15.3 billion and Fidelity National Financial, Inc.'s agreement to purchase Stewart Information Services Corporation for a $1.2-billion cash-stock deal. Price Performance
The Insurance industry has underperformed the S&P 500 index since the onset of the first quarter. While the industry has decreased 7.9%, the elite index has declined 2.5%.
Riding high on tailwinds, insurers enjoyed a favorable operational backdrop to generate improved results. With the help of our Zacks Stock Screener , we identified stocks poised to outshine the Zacks Consensus Estimate in the first quarter. Our proven model conclusively states that because of an ideal combination of the two ingredients - a positive Earnings ESP and a favorable Zacks Rank - the following stocks are likely to surpass expectations at their earnings announcement. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Also, these stocks with an impressive VGM Score of A or B boast an encouraging earnings history, showing estimate beat in each of the last four quarters, reflecting operational excellence.
American Financial Group, Inc . AFG provides property and casualty insurance products in the United States.
Zacks Rank #3 (Hold)
Earnings ESP: +2.81%
Average four-quarter positive surprise: 26.31%
The Zacks Consensus Estimate of $1.90 is estimated to grow 12.4% year over year in Q1
VGM Score of A
The Allstate Corporation ALL engages in property and casualty insurance as well as life insurance businesses in the United States and Canada.
Zacks Rank of 3
Earnings ESP: +2.38%
Average four-quarter positive surprise: 58.04%
The Zacks Consensus Estimate of $2.40 is estimated to grow 46.3% year over year in Q1
VGM Score of A
American Equity Investment Life Holding Company AEL provides life insurance products and services in the United States.
Zacks Rank #2 (Buy)
Earnings ESP: +1.61%
Average four-quarter positive surprise: 27.23%
The Zacks Consensus Estimate of 83 cents is estimated to grow 25.8% year over year in Q1
VGM Score of A
Torchmark Corporation TMK provides various life and health insurance products plus annuities in the United States, Canada and New Zealand.
A Zacks #3 Ranked player
Earnings ESP: +0.29%
Average four-quarter positive surprise: 1.48%
The Zacks Consensus Estimate of $1.43 is estimated to grow 26.9% year over year in Q1
VGM Score of B
CNO Financial Group, Inc . CNO develops, markets and administers health insurance, annuity, individual life insurance and other insurance products for senior as well as middle-income markets in the United States.
A #3 Ranked stock
Earnings ESP: +2.27%
Average four-quarter beat: 23.86%
The Zacks Consensus Estimate of 44 cents is estimated to grow 29.4% year over year in Q1
VGM Score of B
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Torchmark Corporation (TMK): Free Stock Analysis Report American Equity Investment Life Holding Company (AEL): Free Stock Analysis Report American International Group, Inc. (AIG): Free Stock Analysis Report CNO Financial Group, Inc. (CNO): Free Stock Analysis Report XL Group Ltd. (XL): Free Stock Analysis Report The Allstate Corporation (ALL): Free Stock Analysis Report American Financial Group, Inc. (AFG): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research