The finance sector is set to kick off its earnings season this week with major banks reporting quarterly results. Improving rate environment and tax cuts should continue to drive the sector's performance. Earnings for the sector are expected to increase 18.5 percent on 3.6 percent higher revenues.
Insurers, an important component of the finance sector, are shortly going to release their financial numbers. Earnings for insurers are projected to grow 12.2 percent in the second quarter, given a slew of tailwinds favoring its operating environment.
Progressing Rate Environment
The second quarter of 2018 marked the second rate hike by the Federal Reserve this year, reflecting a robust economy. The rate now stands at 2 percent with the regulatory body's intentions of two more raises in 2018 followed by three in 2019 as well as a couple of in 2020.
A Benign Catastrophy Environment
Although the second quarter escaped the harsh lashes of Mother Nature, a few cat events like rain storms in the United States and Canada still plagued the period. A Morgan Stanley analyst estimates global insured cat loss of about $7.1 billion in the quarter under discussion. The analyst also noted that the count is much lower than the general tally of around $14 billion insurers having suffered natural calamities in any given second quarter.
However, price hikes, prudent underwriting practices, portfolio repositioning and adherence to reinsurance covers will help insurers withstand the deficits.
Also, lower cat loss means lower claims, which in turn, strengthens reserves. The insurance industry is already boasting an all-time sturdy capital position.
While surplus capital is lending a cushion to more capital deployment in growth initiatives, mergers and acquisitions plus shareholder value addition, the same is also responsible for restricting the desired pricing. A Morgan Stanley analyst noted that Jun 1 renewals witnessed an average 1 percent increase, which is lower than expected.
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