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First-quarter earnings season has already witnessed 130 elite S&P 500 index members having reported quarterly results so far. Let's see, how the quarter pans out for the life and non-life or the property and casualty (P&C) insurance space.
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The insurance industry is likely to deliver solid earnings in the first quarter, riding on the strength of an improving rate environment, tax cuts, favorable operating environment and a better domestic growth scenario.
An Improving Rate Environment
Reflecting economic stability, the Fed has hiked interest rate for the sixth time since December 2015, the recent being in March this year. The rate environment has improved to 1.75% from the near zero level.
The first quarter thus continues to enjoy the positive impact of a favorable rate environment, driving the insurer's investment results and the performance of life insurers.
Although insurers have lowered their exposure to interest-sensitive product lines to weather the low rate environment, they stand to benefit from the increasing rates as investment yield improves.
A Benign Catastrophe Environment
Though the first quarter encountered the California mudslide and the northeast winter storms, the insurers escaped a severe magnitude of catastrophe loss. A Morgan Stanley analyst estimates global insured cat loss in the first quarter between $5 billion and $10 billion.
Insurers having already suffered the extremities of cat loss last year could manage to brave its first-quarter damages as well. Nonetheless, first-quarter earnings are burdened by catastrophe loss. Underwriting profitability is affected, albeit to a lesser degree. Recently, Chubb Ltd (NYSE: CB ) reported a drag of 64 cents on its bottom line attributable to cat loss.
Prudent underwriting standards and cost control measures will likely support profitability.
Impact of Tax Reforms
The new tax rate has been implemented effective first-quarter 2018. The overhaul of the tax system slashed the tax rate to 21% from 35%. A lower tax incidence is expected to boost net income, the bottom line as well as the scope for more capital deployment.
Progressing Economy: A Tailwind
Also, a progressing economy reflects a better employment scenario and the GDP translating into a more disposable income plus a better consumer sentiment.
Growth in job opportunities has been solid through the first three months of 2018 with an average of nearly 0.202 million, above the year-ago tally of 0.182 million.
This, in turn, might have supported more policy writings, thus driving the premiums higher. Premiums contribute a lion's share to an insurer's top line.
Diverse product offerings, portfolio repositioning, geographic expansion, cost-curbing efforts, share repurchases and strategic integrations should have propelled better performances.
Ways to Pick the Perfect Insurance Stocks
With tailwinds rallying around the industry, investors can comfortably bet on stocks, poised to deliver a positive earnings surprise in the upcoming reports.
Choosing the right stock for one's portfolio from too many participants is certainly a tough task for investors. But an easy way to shorten the list is by selecting stocks with a positive Earnings ESP and a solid Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), which help surpassing the estimates.
Earnings ESP is our proprietary methodology for determining stocks with the best chances of delivering an earnings beat in the next announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that the stocks with the perfect combination of the two key ingredients have 70% chances of a positive earnings surprise.
For investors seeking to apply this strategy in their portfolios, we have highlighted four insurance stocks which might stand out from the crowd with an earnings beat in the upcoming releases.
Insure Your Portfolio: Allstate Corp (ALL)
Northbrook, IL-based Allstate Corp (NYSE: ALL ) engages in property and casualty insurance, and life insurance businesses in the United States and Canada.
With a Zacks Rank #3 and an Earnings ESP of +4.24%, Allstate looks well-poised for a positive surprise. The Zacks Consensus Estimate for the first quarter is pegged at $2.53 per share, up 54.3% year over year.
With respect to the surprise trend, the company's earnings surpassed expectations in the last four quarters. Allstate will announce first-quarter results after the closing bell on May 1.
Insure Your Portfolio: American Financial Group Inc (AFG)
Cincinnati, OH-based American Financial Group Inc (NYSE: AFG ) provides property and casualty insurance products in the United States.
The company has an Earnings ESP of +2.24% and a Zacks Rank of 2. It is therefore likely to deliver another quarter of a positive earnings surprise.
The Zacks Consensus Estimate for the first quarter is pegged at $1.94 per share, up 14.8% year over year. The company outperformed expectations in the trailing four quarters.
American Financial is scheduled to report first-quarter earnings numbers after the closing bell on May 2.
Insure Your Portfolio: American Equity Investment Life Holding (AEL)
West Des Moines, IA-based American Equity Investment Life Holding (NYSE: AEL ) develops and sells fixed index and fixed rate annuity products in the United States.
American Equity Investment carries a Zacks Rank of 3 and an Earnings ESP of +1.61%. The Zacks Consensus Estimate for the first quarter is pegged at 83 cents per share, up 25.8% year over year.
The company exceeded expectations in the preceding four quarters. American Equity Investment will release first-quarter results after market close on May 2.
Insure Your Portfolio: National General Holdings Corp (NGHC)
Headquartered at New York, NY, National General Holdings Corp (NASDAQ: NGHC ) is a specialty personal lines insurance holding company providing various insurance products and services in the United States.
The company has an Earnings ESP of +12.5% and a Zacks Rank #1. National General looks well set for a likely positive surprise. The consensus mark for the to-be-reported quarter stands at 51 cents per share, up 34.2% year over year.
The company outshone estimates in two of the last four quarters. National General is scheduled to announce first-quarter financial figures after the market closes on May 7.
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