Insurers Q4 Earnings Preview for Feb 8: AIG, AIZ, HIG, WLTW

The fourth-quarter earnings season is in full swing, with 251 members of the elite S&P 500 index having already reported financial numbers so far.  Per the latest Earnings Preview, performances indicate a 16% increase in total earnings on 10.5% higher revenues. The beat ratio is impressive with 80.5% companies surpassing bottom-line expectations and 64.9%, outperforming on the top-line front.

On an encouraging note, the Finance sector (one of the 16 Zacks sectors) has delivered a strong performance till now. Per the Earnings Preview, earnings are expected to grow 5.7% on 2.8% higher revenues.

Industry Sneak Peek

The insurance industry, as an integral component of the Finance sector is likely to perform slightly better in the soon-to-be-reported quarter compared with the third quarter. However, the insurers’ underwriting profitability is still likely to bear the brunt of the California wildfires in the fourth quarter. This downside further added to the woes with the catastrophe modeling firm AIR Worldwide, estimating cat loss at approximately $10.5 billion.

However, such a massive loss led insures to brave the price hike that remained flat due to a not-so-active catastrophe environment. This in turn has even helped improving the premiums and driving the top line as well.
Also, prudent underwriting practices aided insurers to weather the cat event.

Net investment income, an important ingredient of an insurer’s top line, is expected to have substantially improved on the back of a rising interest rate environment. Although the interest rates have been increasing at a slower pace, the impact of rate hike is clearly visible in the insurers’ investment portfolios. Notably, the Fed kept its promise of three hikes in 2017, the last one made in December, having raised enough optimism among investors.

Diverse product offerings, a wide geographical footprint and strong client retention are anticipated to have enhanced insurers’ performance in the quarter to be reported.

Moreover, the tax reform policy — enacted in December 2017, reducing the tax rate to 21% from 35% — is expected to benefit the insurance industry to a considerable extent. A lower tax rate would aid the companies’ bottom line, boosting margins directly. Additionally, the tax cut is estimated to make U.S. insurers more competitive, globally.

With 482 companies (92 S&P 500 members) set to announce earnings results this week, let’s find out how the following insurers are placed ahead of their quarterly releases on Feb 8.

American International Group Inc. AIG results are expected to suffer from weak performance of its Commercial segment, loss from catastrophes and a lower amount of share buyback.

The company’s Commercial insurance segment has been underperforming for several quarters. The segment is reeling under a rise in core losses and adverse development to account for current loss trends. Given that the company has exited some of its casualty lines business, we expect the top line to remain under pressure.

The company’s nature of operations exposes it to weather-related losses. AIG expects to incur loss of $500 million from the California wildfires that will hurt fourth-quarter margins. (Read more: Will California Fire & Commercial Unit Hurt AIG Q4 Earnings?)

The Zacks Consensus Estimate for earnings of 87 cents per share for the yet-to-be-reported quarter reflects a 3.6% year-over-year increase. AIG carries a Zacks Rank #3 (Hold) that increases the predictive power of ESP.

However, it’s Earnings ESP of -14.8% leaves surprise prediction inconclusive, as the company needs a positive ESP to be confident about an earnings surprise. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

American International Group, Inc. Price and EPS Surprise

American International Group, Inc. Price and EPS Surprise | American International Group, Inc. Quote

Results of Assurant, Inc.’s AIZ Global Housing segment in the fourth quarter are likely to be weighed on by cat loss, stemming from California wildfires. However, net earned premiums and earnings are expected to have decreased in the period, attributable to ongoing normalization of lender-placed and soft performance in mortgage solutions.

A combination of profitable growth and operating efficiencies has likely aided Global Lifestyle segment’s earnings growth and margin expansion.
Growth in mobile business as well as higher contributions from vehicle protection and expense efficiencies has possibly augmented operating income at Connected Living. (Read more: Will Global Lifestyle Aid Assurant's Q4 Earnings?)

The Zacks Consensus Estimate for earnings of $1.58 per share for the yet-to-be-reported quarter reflects a 243.5% year-over-year increase. Assurant carries a Zacks Rank #3 that increases the predictive power of ESP. However, it’s Earnings ESP of 0.00% leaves surprise prediction inconclusive as the company needs a positive ESP to be confident about an earnings surprise.

Assurant, Inc. Price and EPS Surprise

Assurant, Inc. Price and EPS Surprise | Assurant, Inc. Quote

The Hartford Financial Services Group, Inc.’s HIG top line is likely to be boosted by strong performance of the Commercial Lines and Personal Auto business in the fourth quarter, continuing the previous trend.
Commercial Lines in small and middle markets are also likely to have performed well, boosting both the top and bottom line, continuing the previous quarter’s trend.

The company’s Group Benefit and Mutual Funds segments are expected to have delivered a solid performance, reflecting the company’s claims of improvements made in its book of business over the years.

In addition, Hartford Financial’s strategic investment in products, distribution, data and analytics, as well as digital capabilities, aimed at customer acquisition and retention, are likely to contribute to revenue growth. (Read more: Hartford Financial Q4 Earnings: What's in the Offing?)

The Zacks Consensus Estimate for earnings of 74 cents per share for the yet-to-be-reported quarter reflects a 31.5% year-over-year decline. The combination of Hartford Financial’s Zacks Rank of 3 and Earnings ESP of +7.38% makes us confident about a likely earnings surprise.

Hartford Financial Services Group, Inc. (The) Price and EPS Surprise

Hartford Financial Services Group, Inc. (The) Price and EPS Surprise | Hartford Financial Services Group, Inc. (The) Quote

Willis Towers Watson Public Limited Company WLTW is an advisory, broking and solutions company based in London, UK.

Willis Towers’ operating expenses have been rising over the last several quarters. This resulted in the contraction of operating margins. Expenses increased nearly 2% in the third quarter of 2017. Willis Towers also estimates about $10 million of expense from currency-hedging programs in the fourth quarter of 2017. Such high expenses might weigh on the margins.

Organic growth in commissions and fees that form the major component of Willis has increased in the first nine months of 2017 and the trend is expected to be seen in the to-be-reported quarter, given its solid customer retention levels and growing new business.

Moreover, the company’s strong balance sheet enables disciplined share buyback that should provide an extra cushion to its earnings.

The Zacks Consensus Estimate for earnings of 74 cents per share for the yet-to-be-reported quarter reflects a 31.5% year-over-year decline. Willis Towers carries a Zacks Rank #5 (Strong Sell) and an Earnings ESP of +0.63%.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Willis Towers Watson Public Limited Company Price and EPS Surprise

Willis Towers Watson Public Limited Company Price and EPS Surprise | Willis Towers Watson Public Limited Company Quote

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Willis Towers Watson Public Limited Company (WLTW) : Free Stock Analysis Report
 
American International Group, Inc. (AIG) : Free Stock Analysis Report
 
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Hartford Financial Services Group, Inc. (The) (HIG) : Free Stock Analysis Report
 
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