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4 Insurance Stocks for Q1 Earnings Beats

The first-quarter earnings season is officially underway with 4.2% of the S&P 500 members having reported already. Let’s see how the quarter turned up for the life and non-life or property and casualty (P&C) insurance space.
 
Fortunately, the frequency and magnitude of catastrophe activities – the key factors influencing this industry – have toned down. This has been favoring underwriting results over the past few quarters including the first quarter of 2016. The other driver, the interest rate, should boost insurers’ top line following the slight increase by the Fed last December,
 
Catastrophe Events
 
Though the first quarter escaped violent weather events, many a storm weighed on insurers’ bottom line. In fact Kemper Corporation (KMPR) estimates catastrophe loss of $35–$45 million due to storms – the hail storm in north Texas on Mar 23 in particular. Also, the insurer is not hopeful of recovering any of these losses from its catastrophe reinsurance program.
 
Though the loss affected underwriting results, it could not drain out insurers’ capital. As a result, insurers have been able to maintain their sturdy reserves.
 
Interestingly, property and casualty insurers are better prepared to weather the storm with prudent underwriting practices.
 
Interest Rate Environment
 
With the Federal Open Market Committee (FOMC) raising the rates to only 0.25–0.50% at its December meeting and maintaining the same at its March meeting, the interest rate environment still remains low. This has dampened investment income, which forms a major revenue component for insurers. A low rate puts pressure on investment income and in turn on investment yields. But a broader invested asset base, alternative asset classes and improving equity market conditions bring some respite.
 
Life insurers stand to gain from an improving rate environment. These insurers suffer spread compression on products like fixed annuities and universal life due to sustained low rates. Even the slight improvement in rates should help them enjoy higher income.
 
It’s not that a low interest rate regime does not bring any fortunes for insurance companies. These generally hold a considerable amount in bonds, which would see a decline in value if rates rise. 
 
Economic Recovery
 
With surplus in hand, thanks to economic recovery and an improving employment level, people are opting for insurance coverage. Insurers are not only redesigning and re-pricing their products that are driving premiums higher but are also managing underwriting costs prudently to boost profitability.
 
Emerging risks of cyber threats open avenues for additional premiums through higher premium and policy counts. Additionally, improvement in the real estate market and corporate bonds should tone down credit-related investment losses.
                                                                   
Consolidation and Capital Deployment
 
The first quarter saw a series of consolidations in the industry. While these consolidations were made to widen global footprint, the companies also braced offerings via portfolio diversification and added capabilities. Also, consolidations give insurance companies a competitive edge as they manage to grab more market share. Moreover, these testify to insures’ balance sheet strength and infuse more capital into an already well-capitalized industry.
 
During the January-March period, ACE Limited closed the buyout of The Chubb Corporation (CB) and assumed the latter’s name and ticker symbol. Also, Willis Group Holdings plc took over Towers Watson to form a new entity Willis Towers Watson plc (WLTW).
 
Sun Life Assurance Company of Canada, the wholly owned subsidiary of Sun Life Financial Inc. (SLF), acquired the employee benefits business of Assurant Inc. (AIZ).
 
The quarter also witnessed effective capital deployment via dividend hikes and share buyback activities riding on insurer’s capital strength. These in turn enhanced shareholders value.
 
To sum up, the Zacks Industry Rank for the P&C insurance industry is #94, which is in the middle 1/3 tier while the Life insurance industry falls in the lower 1/3 tier of the ranking system. These point to a neutral to negative outlook. Yet, with strong positives guarding the results, investors can bet on stocks that are poised to deliver positive earnings surprises in their upcoming reports. 
 
Way to Pick the Right Insurance Stocks
 
Picking the right stock for your portfolio from too many participants could be difficult. But an easy way to narrow down the list is to look at stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
 
Earnings ESP is our proprietary methodology for determining stocks with the best chance of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
The combination of a favorable Zacks Rank and a positive Earnings ESP is usually an indication of an earnings beat. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
 
For investors seeking to apply this strategy to their portfolio, we have highlighted four P&C insurance stocks that might stand out with an earnings beat in their releases. 
 
The Travelers Companies Inc. (TRV)
 
New York-based The Travelers Companies Inc., a holding company, is principally engaged, through its subsidiaries, in providing a wide variety of property and casualty insurance and surety products and services to businesses, organizations and individuals in the U.S. and select international markets.
 
Travelers has a Zacks Rank #2 and an Earnings ESP of +3.5%. The Zacks Consensus Estimate for the first quarter stands at $2.57 per share. The company has outperformed expectations in three of the last four quarters, with an average beat of 14.3%.
 
Travelers will announce first-quarter results before the opening bell on Apr 21.
              
Aspen Insurance Holdings Limited (AHL)
 
Based in Hamilton, Bermuda, Aspen Insurance Holdings Limited, through its subsidiaries, provides insurance and reinsurance coverage across the globe.
 
With a Zacks Rank #2 and an Earnings ESP of +9.76%, Aspen Insurance looks well poised for a positive surprise. The Zacks Consensus Estimate for the first quarter is pegged at $1.23 per share. With respect to the surprise trend, the company surpassed expectations in two of the last four quarters.
 
Aspen Insurance will announce first-quarter results after the closing bell on Apr 21.
 
American Financial Group, Inc.  (AFG)
 
Founded in 1872, American Financial Group, Inc. is a holding company which, through its subsidiaries, engages primarily in property and casualty insurance, with focus on specialized commercial products for businesses. It is also involved in the sale of fixed and fixed-indexed annuities in the individual, bank and education markets.
 
American Financial has a Zacks Rank #2 and an Earnings ESP of +4.13%. The Zacks Consensus Estimate for the first quarter is pegged at $1.21 per share. The company has outperformed expectations in two of the last four quarters.
 
American Financial will announce first-quarter 2016 results after the closing bell on May 2.
 
Lincoln National Corp. (LNC)
 
Founded in 1904 and headquartered in Philadelphia, PA, Lincoln National Corp. is a diversified life insurance and investment management company.
 
With a Zacks Rank #3 and an Earnings ESP of +0.67%, Lincoln looks well poised for a positive surprise. The Zacks Consensus Estimate for the first quarter is $1.49 per share.
 
Lincoln is scheduled to announce first-quarter results after the closing bell on May 4.

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