Zacks Investment Research | Oct 31, 2016 10:16PM ET
The Q3 earnings season is at its peak with results from 58.2% of the S&P 500 Index members already on board. Earnings of these 291 members (accounting for 68.5% of the index’s total market capitalization) are up 2.2% on 1.3% higher revenues, per the latest Earnings Preview report. While 73.5% of these companies delivered positive earnings surprises, 57.4% managed to beat revenue estimates.
The Finance sector (one of the 16 Zacks sectors) has started the Q3 earnings season on a strong note. In fact, the financial performance of 78.9% companies from this sector that have already reported their quarterly results indicates 9.3% earnings growth due to a 5.9% increase in revenues, on a year-over-year basis. Moreover, the beat ratios of 74.6% for the bottom line and 73.2% for the top line compare favorably with the S&P 500.
The Finance sector is highly diversified and includes several industries like insurance, banks and financial transaction services to name a few.
Insurers (particularly the property and casualty companies) are expected to witness an improvement in underwriting results – underwriting income and combined ratio – courtesy of a benign cat loss environment. This, along with prudent reserving practices, should lead to favorable reserve development.
The industry is expected to see another profitable quarter backed by capital gains and reserve releases. Exposure to key areas of the economy, such as new vehicle sales and construction, should benefit property and casualty insurers.
However, a still low interest rate environment will continue to weigh on investment yields and consequently hurt investment income. Lower investment income might hurt quarterly revenues as it is one of the major contributors of top-line growth.
Nonetheless, a broader invested asset base and alternative asset classes should offer some respite. We note that insurers that have managed to accumulate excess capital due to lower catastrophe losses in recent years are deploying the same to buy back shares. This strategy should boost their bottom line in Q3.
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