The first-quarter earnings season is in full swing with already 267 members of the elite S&P 500 index having reported financial numbers so far. Per the latest Earnings Preview, performances of these index participants indicate a 25.1% increase in total earnings on 10% higher revenues. The beat ratio is impressive with 76.
8% companies surpassing bottom-line expectations and a 73.8%, outperforming on the top-line front, bearing testament to a solid start.The Financesector (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% more revenues.
Integral to 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 higher net investment income, an important component of an insurer’s top line. Though the same is far from hitting a historical high, it nevertheless shows an upward trend. Notably, the Fed has hiked interest rate five times since December 2015 on the back of a thriving economy and has hinted at two more raises this year, followed by three in 2019 and a couple of in 2020.
Although insurers have lowered their exposure to interest-sensitive product lines to withstand the low rate environment, they look to benefit from the increasing rates as investment yield improves.
The first quarter is likely to benefit from the tax cut. Per the enforcement of the new tax rate effective January 2018, the tax incidence has been reduced to 21% from 35%. This rate slash will possibly lend an extra boost to insurers’ bottom line.
Although the to-be-reported quarter encountered a California mudslide as well as the northeast winter storms, the disasters might still leave the company’s underwriting profitability unhurt. Insurers having already suffered the perils of cat loss last year, should have managed to endure the shortfalls in first-quarter 2018. A Morgan Stanley analyst estimates global insured cat loss between $5 billion and $10 billion. Underwriting profitability is also slightly pressed.
Nonetheless, improved pricing, prudent underwriting practices, portfolio repositioning as well as resorting to reinsurance covers are likely to have cushioned insurers to survive the deficits.
A wide-ranged product portfolio, expanded global footprint and tactical M&A activity might have aided insurers’ performance in the quarter to be reported.
About 900 companies (142 S&P 500 members) will report quarterly results this week. Let’s take a look at how things pan out for the following insurers ahead of their quarterly releases on May 1.
Arthur J. Gallagher & Co.’s AJGtop line is expected to have gained traction from organic sales as well as strategic mergers and acquisitions. Brokerage segment will be benefitted from a favorable forex impact while Employee benefit consulting operations are estimated to have registered organic growth from new business opportunities. Lower tax rate is likely to boost the companies’ bottom line and margin growth directly. However, a projected rise in expenses will likely limit the operating margin expansion.
The Zacks Consensus Estimate of $1.51 per share for the yet-to-be-reported quarter reflects a substantial 277.5% year-over-year increase. Arthur J. Gallagher carries a Zacks Rank #3 (Hold), which increases the predictive power of ESP. However, an Earnings ESPof 0.00% makes our surprise prediction difficult as the company requires a positive ESP to be confident about an earnings surprise. (Read more: www.zacks.com/stock/news/301314/arthur-j-gallagher-ajg-q1-ea...">Arthur J. Gallagher Q1 Earnings: What's in Store?)