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Will Selective Insurance’s Cat Loss Ail Earnings in Q1?


Selective Insurance Group, Inc. SIGI has recently announced catastrophe loss estimates of about $26 billion, emanating from winter storm that impacted the east coast of the United States in early January 2018 and the Nor'easters in March.

This apart, the company also estimated non-catastrophe insured property loss of $28 million from early January deep freeze in the company's footprint states and a relatively large number of severe fire loss.

Selective Insurance noted that the company’s total loss exceeded its expectation by about $33 million, dragging the bottom line by 44 cents.

Recently, another property and casualty insurer Chubb Limited CB issued cat loss estimates of $305 million from California mudslides and northeast winter storms.

However, pre-tax net favorable prior-year casualty reserve development of $8 million and 3.2% higher standard commercial lines pure renewal pricing will limit the downside for Selective Insurance Group to some extent. The company expects the bottom line to be boosted by 11 cents owing to favorable prior year casualty reserve development.

The Zacks Consensus Estimate for the first quarter of 2018 is pegged at 94 cents, reflecting 9.3% year-over-year increase. Nonetheless, we expect the same to move south as analysts start incorporating the cat loss estimate in their numbers.

The company is set to release first-quarter earnings results on May 2. Our proven model shows that the stock is likely to beat estimates this quarter because it has the right combination of two key ingredients for an earnings beat, a favorable Zacks Rank #3 (Hold) and an Earnings ESP of +5.88%.

Being a property and casualty insurer, Selective Insurance has been prone to suffering losses due to catastrophe events. Last year, the company suffered the same of $136 billion. As a result of unprecedented hurricanes, wildfires and earthquakes, 2017 was the costliest year for insurers in terms of cat loss.

For Selective Insurance, catastrophe loss accounted for 290 basis points on the 2017 combined ratio. The company estimates combined ratio for 2018 to hover around 95% with catastrophe loss impact of about 350 basis points.

Nonetheless, the insurer remains focused on achieving a standard Commercial Lines written renewal pure price increase, improving renewal underwriting quality while maintaining strong and stable retention and undertaking underwriting actions in Excess and Surplus Lines segment to improve profitability.

The company believes that these initiatives coupled with lower tax incidence strongly place the company for long-term growth. Shares of the company have outperformed the industry year to date. The stock has inched up 0.5% against the industry’s decline of 0.6%.

Stocks to Consider

Two better-ranked insurers from the same industry are Alleghany Corporation Y and CNA Financial Corporation CNA, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company pulled off an average four-quarter positive earnings surprise of 5.16%.

CNA Financial provides commercial property and casualty insurance products, primarily in the United States. The company delivered an average four-quarter beat of 46.88%.

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