The Q3 earnings season is at its peak with results from 58.2% of the S&P 500 Index members already on board. Earnings of these 291 members (accounting for 68.5% of the index's total market capitalization) are up 2.2% on 1.3% higher revenues, per the latest Earnings Preview report. While 73.5% of these companies delivered positive earnings surprises, 57.4% managed to beat revenue estimates.
The Finance sector (one of the 16 Zacks sectors) has started the Q3 earnings season on a strong note. In fact, the financial performance of 78.9% companies from this sector that have already reported their quarterly results indicates 9.3% earnings growth due to a 5.9% increase in revenues, on a year-over-year basis. Moreover, the beat ratios of 74.6% for the bottom line and 73.2% for the top line compare favorably with the S&P 500.
The Finance sector is highly diversified and includes several industries like insurance, banks and financial transaction services to name a few.
Insurers (particularly the property and casualty companies) are expected to witness an improvement in underwriting results - underwriting income and combined ratio - courtesy of a benign cat loss environment. This, along with prudent reserving practices, should lead to favorable reserve development.
The industry is expected to see another profitable quarter backed by capital gains and reserve releases. Exposure to key areas of the economy, such as new vehicle sales and construction, should benefit property and casualty insurers.
However, a still low interest rate environment will continue to weigh on investment yields and consequently hurt investment income. Lower investment income might hurt quarterly revenues as it is one of the major contributors of top-line growth.
Nonetheless, a broader invested asset base and alternative asset classes should offer some respite. We note that insurers that have managed to accumulate excess capital due to lower catastrophe losses in recent years are deploying the same to buy back shares. This strategy should boost their bottom line in Q3.
Insurance - Property and Casualty Industry Price Index
As many as 1085 companies, including 130 index members, are due to report their results this week. Let's take a look at how these four property and casualty insurers might fare when they report their Q3 numbers on Nov 2.
The Allstate CorporationALL is the second-largest property-casualty (P&C) insurer and the largest publicly held personal lines carrier in the U.S. The company delivered a positive earnings surprise of 16.98% in the last quarter. According to our quantitative model, a company needs the right combination of two key ingredients - a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) - to increase its odds of an earnings surprise. Allstate has a favorable Zacks Rank #3 and an Earnings ESP of +1.61%, which makes us confident of an earnings beat. Please check our Earnings ESP Filter that enables you find stocks that are expected to come out with earnings surprises.
Allstate's strong personal lines business and solid risk-adjusted capitalization will support top-line growth. However, continued stress on the auto repair industry from higher industry frequency, cost of repairing newer and more complex vehicles and a higher total loss volume will likely cause a spike in claim cost. Allstate brand policies in force is also expected to decline in the third quarter, as the company is intentionally reducing new business levels to improve returns on capital for auto insurance. (Read more: Allstate Poised to Beat on Q3 Earnings: Here's Why )
In terms of surprise trend, Allstate beat expectations in all of the last four quarters, with an average beat of 16.11%. The Zacks Consensus Estimate for Q3 is pegged at $1.24 per share.
ALLSTATE CORP Price and EPS Surprise
ProAssurance CorporationPRA operates as a holding company for many property and casualty insurance companies. The company, through its subsidiaries, provides professional liability insurance products, primarily to physicians, dentists, other healthcare providers and healthcare facilities. The company delivered a positive earnings surprise of 19.64% in the last quarter. ProAssurance has a Zacks Rank #4 and Earnings ESP of 0.00%, which makes surprise prediction difficult. We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
With respect to the surprise trend, ProAssurance beat expectations in only one of the last four quarters but with an average beat of 4.24%. The Zacks Consensus Estimate for Q3 is pegged at 45 cents per share.
PROASSURANCE CP Price and EPS Surprise
Fidelity National Financial, Inc . FNF is a provider of title insurance, and technology and transaction services to the real estate and mortgage industries in the U.S. The company delivered a positive earnings surprise of 13.85% in the last quarter. Fidelity National has an Earnings ESP of 0.00%, which complicates our surprise prediction in spite of its favorable Zacks Rank #3. You can see the complete list of today's Zacks Rank #1 stocks here .
With respect to the surprise trend, Fidelity National beat expectations in two of the last four quarters with an average beat of 2.02%. The Zacks Consensus Estimate for Q3 is pegged at 75 cents per share.
FNF GROUP Price and EPS Surprise
Markel Corp . MKL markets and underwrites specialty insurance products in the U.S. and globally. The company delivered a negative earnings surprise of 22.38% in the last quarter. Markel has a Zacks Rank #3 but its Earnings ESP of 0.00% makes surprise prediction difficult.
With respect to the surprise trend, Markel beat expectations in three of the last four quarters with an average beat of 42.55%. The Zacks Consensus Estimate for Q3 is pegged at $7.68 per share.
MARKEL CORP Price and EPS Surprise
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.