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CNA Financial (CNA) Q3 Earnings: Catastrophe Losses to Hurt?

CNA Financial Corporation CNA is slated to report third-quarter 2017 results on Oct 30, before the market opens. The company delivered a positive earnings surprise in the last two quarters. Let’s see what it has in store for this yet-to-be reported quarter.

Being a property and casualty (P&C) insurer, CNA Financial has likely incurred higher catastrophe losses, significantly, due to the unprecedented hurricane activity occurring during the third quarter. This in turn will affect the company’s underwriting profitability, rendering volatility to the P&C insurer’s earnings. The Zacks Consensus Estimate for  third-quarter 2017 is currently pegged at 27 cents, reflecting a noticeable plunge of 76.5% from the year-ago quarter.  

Despite the P&C insurer’s impressive track record of maintaining the combined ratio at favorable levels, the company has likely experienced deterioration in the same, in the soon-to-be-reported quarter due to high level of catastrophe losses. The Zacks Consensus Estimate for the combined ratio is currently pegged at 95%, representing a deterioration of 500 basis points on a year-over-year basis.

Further, the company might have incurred higher expenses, primarily due to increasing net incurred claims and benefits and amortization of deferred acquisition costs. This rise in expenses is likely to restrict the operating margin expansion, which might hurt the company’s overall profitability.

Nonetheless, net premiums earned have likely increased in the yet-to-be-reported quarter, driven by an improvement in new business as well as a solid retention. The Zacks Consensus Estimate for net premiums earned is currently pegged at $1.8 billion, reflecting a substantial increase of 8.1% from the prior-year quarter.

Additionally, with the rising interest rate environment, the P&C insurer has likely reported higher net investment income. Also, improved limited partnership returns have likely contributed to the increase in investment income. The Zacks Consensus Estimate for net investment income is currently pegged at $505 million, denoting a surge of 36.1% on a year-over-year basis.

Earnings Whispers

Our proven model does not conclusively show that CNA Financial is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a bullish Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: CNA Financial has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 27 cents. You can uncover the best stocks to buy or sell before they are reported with our https://www.zacks.com/premium/esp-buy?adid=zp_article_espfil...">Earnings ESP Filter.

Zacks Rank: CNA Financial carries a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. Hence, we caution against all Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks worth considering from the insurance industry with the right combination of elements to come up with an earnings beat this quarter are as follows:

Prudential Financial PRU is set to report third-quarter earnings on Nov 1 with an Earnings ESP of +0.07% and a Zacks Rank #2. You can see https://www.zacks.com/stocks/buy-list/?ADID=zp_1link&ICI... _1link">the complete list of today’s Zacks #1 Rank stocks here.

Lincoln National Corporation LNC has an Earnings ESP of +0.05% and also holds a Zacks Rank of 2. The company is slated to report third-quarter earnings on Nov 1.

American Equity Investment Life Holding Company AEL has an Earnings ESP of +0.40% and sports a Zacks Rank of 1. The company is set to report third-quarter earnings on Nov 6.

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Lincoln National Corporation (LNC): Free Stock Analysis Report
 
American Equity Investment Life Holding Company (AEL): Free Stock Analysis Report
 
Prudential Financial, Inc. (PRU): Free Stock Analysis Report
 
CNA Financial Corporation (CNA): Free Stock Analysis Report
 
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