Insurers Reporting Q4 Earnings On Jan 31: AFL, LNC, UNM

Fourth-quarter earnings have already crossed the halfway mark. As of Jan 26, 26% S&P 500 companies reported results with strong earnings numbers and 24% of them are slated to release this week.

Per the latest Earnings Preview, total earnings for the 133 S&P 500 members that have reported results already are up 12.3% year over year on 8.8% higher revenues, with 81.2% beating EPS estimates and 78.9% topping revenue estimates. About 65.4% of the companies have surpassed both EPS and revenue estimates.

Industry Trends

Insurance industry, an integral part of the Finance sector, will witness soft performance in the to-be-reported quarter which will drag the sector’s fourth-quarter results. Per the Earnings Preview, earnings of the Finance sector will improve 8.4% with revenues increasing 2.4% year over year.

A slew of natural calamities inducing cat loss dented the underwriting profitability of insurers this year. The fourth quarter is likely to suffer due to the California wildfires. As a result, insurers have hiked prices that remained flat due to a not-so-active catastrophe environment. With higher prices, insurers not only will enjoy higher premiums going forward but also be well-equipped to settle claims without hurting profitability.

In addition, since December 2016, four rate hikes have been made and the interest rate now stands at 1.25-1.50%. Also, the Fed has reiterated the expectation to raise rates thrice in 2018 and twice in 2019. Owing to a gradually improving rate environment, investment results have improved moderately from the historical lows.

Moreover, the tax reform policy, enacted in December 2017, that lowers the corporate tax burden to 20% from 35%, is likely act as an impetus, aiding margin expansion. However, due to reduction in tax rates, insurers are writing down deferred tax assets that in turn will adversely impact their risk-based capitalization levels and also reduce net income for some players in the fourth quarter.

Stocks to Consider

First, Aflac Inc.’s (NYSE:AFL) fourth-quarter results are expected to benefit from increased revenues from its U.S. segment that has been performing strongly as evident from rise in revenues since 2010.

Also, we expect sales increase to continue in the fourth quarter given the number of growth initiatives such as the adoption of Everwell for increased penetration, delivery of value-added services and increased client retention; product partnering to drive improved account values and employee access; and investment in administrative capabilities. The Zacks Consensus Estimate for revenues from this segment is $1.6 billion, which translates into year-over-year growth of 6.7%.

Aflac’s top line remains sufficiently exposed to a challenging operating environment, primarily in Japan. The persistent low interest rate environment has led the company to deemphasize sales of first-sector (life insurance) products in Japan. Premium growth continues to be pressured by first-sector savings product, WAYS, and a portion of block reaching paid-up status.

Our proven model does not conclusively show that Aflac is likely to beat on earnings this quarter. Aflac has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, the company has an Earnings ESP of -0.49%. Despite carrying a favorable Zacks Rank, a negative earnings ESP makes the prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. (Read more: Will Weak Japan Business Hurt Aflac's Q4 Earnings?)

Aflac Incorporated Price and EPS Surprise

Second, we expect Lincoln National Corporation (NYSE:LNC) to see an increase in total annuity sales, driven by product enhancements that have been well received in the marketplace. The Zacks Consensus Estimate for income from operation for the Annuity segment is $264 million, which reflects year-over-year growth of 9.1%.

Lincoln National’s life insurance business is expected to see top-line growth from a broad product portfolio and an industry-leading distribution network. The company’s Group Protection segment that was challenged in the recent past is now recovering. The fourth quarter is likely to be aided by this segment’s performance as well.

Our proven model does not conclusively show that Lincoln National is likely to beat on earnings this quarter. This is because despite carrying a favorable Zacks Rank #2, an Earnings ESP of 0.00% makes the positive earnings surprise prediction inconclusive. (Read more: Will Annuities Unit Aid Lincoln National Q4 Earnings?)

Lincoln National Corporation Price and EPS Surprise

Third, Unum Group (NYSE:UNM) ) is likely to witness bottom-line growth in the to-be-reported quarter, fueled by better-than-expected performance at Unum U.S. and Colonial Life segments. The Zacks Consensus Estimate is pegged at $1.08, reflecting a year-over-year increase of 8%.

Moreover, the company has likely experienced premium growth at both Unum U.S. and Colonial Life segments, driven by improving sales and persistency.

However, the results of Unum U.K. are expected to have remained soft, due to a challenging economic environment.

Our proven model shows that Unum Group has the right combination of the two key ingredients to beat earnings estimates. The company has a Zacks Rank #2 and a Earnings ESP of +0.83%. (Read more: Will Higher Premiums Drive Unum Group's Q4 Earnings?)

Unum Group Price and EPS Surprise

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