Cuts in earnings estimates in the second quarter from the insurance sector are forecasted based on disappointing first-quarter earnings reports, lower interest rates and relatively weak equity markets, says Joanne A. Smith, CFA, a Director and Senior Equity Analyst at Scotia Capital.
“I was expecting a lot more upside surprises than were delivered. There were only four companies in my universe of stocks that actually outperformed expectations, and there were four disappointments,” she said, “and then, there were two that met expectations, and I was expecting more positive results, part of which was due to some adverse mortality.”
Smith has Aflac Inc. (AFL) as a top pick in her coverage universe as the company has always traded at a significant premium to the peer group, given it produces exceptional profits. She says Aflac has had a track record up until the past couple of years of generating double-digit earnings growth while delivering ROEs that are well above 20%.
“The problem with Aflac right now is that it has become a little bit more complex. People used to love it for its simplicity, and it’s not as simple as it once was,” Smith said. “But I think that once investors are able to digest some of the changes that have taken place at the company and realize that it has not strayed materially from its traditional strategies and core strengths, that the stock will regain its ground.”
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