Insurers’ Q1 Earnings Due on May 2: AIG, LNC, MET, PRU, XL
The first-quarter earnings season has crossed halfway mark with already 267 members of the elite S&P 500 index having reported financial numbers so far. Per the latest Earnings Preview, the beat ratio is impressive with 76.8% companies surpassing bottom-line expectations and a 73.8%, outperforming on the top-line front, thereby bearing evidence to a solid start. Combining the reported results with estimates for the yet-to-release companies, total earnings for the S&P 500 index are anticipated to be up 22.6% from the same period last year, driven by 8.4% growth in revenues.
The Finance sector (one of the 16 Zacks sectors) has delivered a strong performance till now. Per Earnings Preview, earnings are expected to rise 26.4% on 5.7% higher revenues.
An important constituent of the Finance sector, the insurance industry is likely to witness better results this yet-to-be-reported quarter on the back of an improving rate environment, tax cuts, a favorable operating environment and a better domestic growth scenario.
A progressing interest rate environment is likely to have driven solid net investment income, a chief component of an insurer’s top line. Though the metric is far from achieving a historical high, it nonetheless shows an upward trend. Notably, the Fed has hiked interest rate five times since December 2015 on the back of a flourishing economy and has expressed intention to raise the same twice more this year, followed by three in 2019 and a couple of in 2020.
Although insurers have curbed their exposure to interest-sensitive product lines to withstand the low rate environment, they look to take advantage of the increasing rates as investment yield betters.
The first quarter is likely to gain an edge from the tax cut. Per the new tax law effective January 2018, the tax incidence has been decreased to 21% from 35%. This lowering of the rate has added an impetus to insurers’ bottom line.
Although the to-be-reported quarter stumbled upon a California mudslide as well as the northeast winter storms, the company’s underwriting profitability might still be left unscathed despite the cat events. Insurers having already suffered the hazards of weather-related loss in 2017, should have managed to make up for the underperformances in the first quarter of 2018. A Morgan Stanley analyst projects global insured cat loss between $5 billion and $10 billion. Underwriting profitability also seems slightly burdened.
However, improved pricing, intelligent underwriting practices, portfolio restructuring as well as taking recourse to reinsurance covers might have shielded insurers to overcome the deficits.
A varied product portfolio, global growth and tactical M&A activity are expected to have boosted insurers’ operations in the impending quarterly release.
About 900 companies (142 S&P 500 members) are set to report quarterly results this week. Let’s see how things shape up for a few good insurers below before their earnings announcement on May 2.
American International Group, Inc. AIG is expected to witness flat to a slight decline in revenues due to its ongoing efforts in managing the overall business portfolio via reinsurance and divestitures. Low tax rate and share buyback should boost bottom line. Premiums and deposits at Life Insurance business are expected to increase led by strong growth in both term and universal life insurance sales. However, in General Insurance business, premiums are expected to decline due to the company’s remediation of underperforming lines and divestitures.
The Zacks Consensus Estimate of $1.24 per share for the soon-to-be-reported quarter highlights an 8.8% year-over-year fall. AIG carries a Zacks Rank #5 (Strong Sell), which decreases the predictive power of ESP. Although its Earnings ESP of +1.78% makes us confident about an earnings surprise, the stock’s bearish Zacks Rank leaves surprise prediction inconclusive. (Read more: Will Lower Revenues, Share Buyback Hit AIG Q1 Earnings?)
American International Group, Inc. Price and EPS Surprise
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Lincoln National Corporation LNC is expected to witness growth in deposits, net flows, assets and earnings at its Retirement Plan Services segment, strategies to improve wholesaler productivity, initiatives to increase employee contributions as well as investments into improving customer experience. We expect an increase in total Life Insurance sales in the first quarter from higher Executive Benefit sales and gains in Variable Universal Life and term products combined with a consistently high demand for MoneyGuard. Tax reform will likely expand Lincoln National’s margin. Its balance sheet strength and a sturdy capital inflow are also part of the estimate.
The Zacks Consensus Estimate is pegged at $1.94 for the soon-to-be-reported quarter, inching up 1% year over year. Though Lincoln has a favorable Zacks Rank #3 (Hold), an Earnings ESP of 0.00% makes surprise prediction difficult. (Read more: What Awaits Lincoln National This Earnings Season?)
Lincoln National Corporation Price and EPS Surprise
MetLife, Inc.’s MET revenues are expected to have increased on the back of sales growth in Asia and EMEA, growth in operating premiums and fees and other revenues in its Group Benefits segment. As a big investor in the U.S. fixed income market, MetLife should have benefited from economic growth, leading to higher interest rates. However, earnings in Retirement and Income Solutions should be pressured by the flatter yield curve.
The Zacks Consensus Estimate of $1.17 per share for the last completed quarter translates into a 19.9% year-over-year decline. MetLife carries a Zacks Rank of 3, which increases the predictive power of ESP. Nonetheless, its Earnings ESP of -0.06% leaves our surprise prediction inconclusive as the company also needs a positive ESP to increase the odds of an earnings surprise. (Read more: MetLife Q1 Earnings to Buoy on Revenue Growth)
MetLife, Inc. Price and EPS Surprise
Prudential Financial, Inc. PRU is expected to have witnessed bottom-line growth in the soon-to-be-reported quarter owing to recurring premium sales, expanded product offerings, broader distribution capabilities and share buybacks. Core performance of its businesses is mainly fueled by higher fees in its Annuities and Investment Management segments as well as sustained business growth in International Insurance. However, increase in expenses, mainly due to higher insurance and annuity benefits plus general and administrative expenses, is likely to have weighed on the desired margin expansion.
The consensus mark of $2.99 per share for the last completed quarter represents a 7.2% year-over-year rise. Prudential’s weak Zacks Rank #4 (Sell) combined with an Earnings ESP of 0.00% makes surprise prediction unlikely. (Read more: What’s in Store for Prudential Financial Q1 Earnings?)
Prudential Financial, Inc. Price and EPS Surprise
XL Group Ltd.’s XL powerful international exposure, enhanced capabilities and wide-ranging product offerings will likely fuel premium growth. Lower tax should have driven the bottom line as well as margin expansion. The company might have witnessed an increase in operating expenses this yet-to-be-reported quarter, mainly due to higher net loss and loss expenses incurred as well as on claims and policy benefits. This in turn is anticipated to limit the operating margin expansion as well.
The consensus estimate of 95 cents per share reflects a 90% year-over-year improvement. A Zacks Rank of 4 combined with an Earnings ESP of -5.80% induces an unlikely surprise prediction. (Read more: Will Higher Premiums Drive XL Group’s Q1 Earnings?)
XL Group Ltd. Price and EPS Surprise
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Lincoln National Corporation (LNC): Free Stock Analysis Report
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XL Group Ltd. (XL): Free Stock Analysis Report
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