Key Predictions for Q3 Earnings Reports of TMK, XL, WRB

The third-quarter earnings season is gaining pace with 17.4% members of the elite S&P 500 Index having reported solid quarterly numbers so far.  The Finance sector (one of the 16 Zacks sectors) has delivered a strong performance till now. About 50.7% of the sector’s market cap in the S&P 500 index that have reported results so far shows 7.8% earnings growth on 3.3% increase in revenues, both on a year-over-year basis. The beat ratio of 71.4% for the bottom line compared favorably with that of the S&P 500. However, the beat ratio of 50% for the top line is lower than the same of the S&P 500. 

Insurance industry, an integral part of the Finance sector, will witness soft results this yet-to-be-reported quarter. A soft performance from the insurance industry will drag the Finance sector’s third-quarter results. Per our Earnings Preview, earnings of the Finance sector will decline 1.5% though revenues will increase 1.1%.

The third quarter witnessed a slew of catastrophes, which will weigh on underwriting profitability as well as the bottom line of insurers. Per the catastrophe modeler AIR Worldwide, the insured loss estimates from Irma could range between $25 billion and $35 billion and between $40 billion and $85 billion from Maria. Moody’s Analytics earlier estimated economic losses from Irma to come in the $58-$83 billion band while that from Harvey could be as high as $108 billion. Mexican tremors have all the more added to the woes.

Though increasing catastrophes will induce fluctuation in underwriting results, we expect prudent underwriting practices and capital reserve piled up on a benign catastrophe environment to withstand the loss to some extent.

We do not expect pricings to have been strong in the third quarter.

However, net investment income, an important component of an insurer’s top line, is likely to witness improvement courtesy three rate hikes approved since December 2016. Though rate environment is improving at a very slower pace, the impact of rate increase is clearly visible in the insurer’s investment results. The third quarter will also not be an exception.

Higher rates should offer some respite to life insurers, which suffered spread compression on products like fixed annuities and universal life due to continuous low rates. Annuity sales should have also benefited from higher rates. However, life insurers have considerably lowered their exposure to interest-sensitive product lines.

With more than 700 companies (180 S&P 500 members) set to report their results this week, let’s find out where the following insurers stand before their release of quarterly numbers on Oct 24.

Torchmark Corporation’s TMK premiums are expected to have increased on higher Life as well as Health premiums. The Zacks Consensus Estimate for premiums reflects an increase of 3.7% year over year.

Torchmark expects excess investment income to grow about 75% and between 9% and 10% on a per share basis in the second half of 2017. The Zacks Consensus Estimate for excess investment income reflects nearly 6% rise year over year.

However, higher administrative expenses will likely weigh on insurance underwriting income in the quarter to be reported.

The Zacks Consensus Estimate for earnings is $1.20 for the yet-to-be-reported quarter, reflecting a 4.2% year-over-year increase. Torchmark currently has a Zacks Rank #3 (Hold) and combined with an Earnings ESP of +0.14% makes us confident of an earnings beat this quarter. (Read more: Can Torchmark Deliver a Beat this Earnings Season?)

Torchmark Corporation Price and EPS Surprise

Torchmark Corporation Price and EPS Surprise | Torchmark Corporation Quote

XL Group Ltd’s XL underwriting profitability will be weighed on by catastrophe losses.  The company estimates nearly $1.4 billion in cat losses in the third quarter. This will heavily drag the bottom line.

Gross premiums written are also expected to be lower due to non-renewal of large international casualty quota share treaty. Nonetheless, lower operating expenses and share buybacks might offer a cushion to the bottom line.

The Zacks Consensus Estimate stands at a loss of $3.74 for the yet-to-be-reported quarter compared with 44 cents earned in the year-ago quarter.  XL Group currently has a bearish Zacks Rank #4 (Sell) and combined with Earnings ESP of 0.00% makes surprise prediction difficult this quarter. (Read more:What's in the Cards for XL Group this Earnings Season?)

XL Group Ltd. Price and EPS Surprise

XL Group Ltd. Price and EPS Surprise | XL Group Ltd. Quote

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter..

The earnings of W.R. Berkley Corp. WRB are projected to decline in the third quarter. Its Zacks Consensus Estimate for earnings of 32 cents reflects a year-over-year plunge of 64%. Also, the Zacks Consensus Estimate for sales is $1.7 billion, reflecting a slight year-over-year decline of 0.8%.

Our quantitative model cannot conclusively predict if W.R. Berkley is likely to beat estimates. This is because it has a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. Plus, combined with an Earnings ESP of 0.00%, makes surprise prediction difficult.

W.R. Berkley Corporation Price and EPS Surprise

W.R. Berkley Corporation Price and EPS Surprise | W.R. Berkley Corporation Quote

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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