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1、P&C Insurance Earnings Preview 2Q19: Is commercial pricing momentum sustainable?P&C stocks rallied in 2Q19 on improved pricing and declining interest ratesThe FactSet P&C Aggregate Index was +10.0% in 2Q19, outperforming otherfinancials (S&P Financials +6.1 %) and the S&P 500 (3.4%). Commercial line
2、s pricing (particularly excess and surplus or E&S lines) continues to improve and mid-year reinsurance renewals were favorable. Coupled with the defensive nature of the group, P&C insurance outperformed. We expect a generally positive 2Q19 earnings season for P&C insurers.2Q19 adjustments are minima
3、l, mostly company-specificWe are generally more positive on commercial lines into results given a more favorable pricing environment and margin outlook than personal lines. We are currently above consensus on 9 companies and below on 5 companies. We raised 2Q19 EPS estimates for 6 companies and lowe
4、red them for 5 companies. Our downward revisions for 2Q19 primarily reflect modestly higher catastrophe losses for primary insurers and weak hedge fund returns, while upward revisions reflect a light catastrophe loss quarter for reinsurers.Positive on AXS, and cautious on MMC into the quarterGoing i
5、nto 2Q19, we are positive on AXS given our view that momentum in the E&S and Lloyds specialty markets has continued to build throughout the quarter and we expect a bullish tone on the earnings call, which should drive positive 2020 earnings revisions. Our 2Q19 estimate is essentially in line with co
6、nsensus, which we view as conservative with the possibility for better-than-expected margin expansion. Conversely, we are cautious on MMC into earnings given the potential for weak organic revenue growth from J LT and difficult organic growth comps.Figure 1: Summary of current estimates and ratingsS
7、ource: UBSe, FactSetTickerrricc719/2019RatingPrice Target2Q2U19E E”New2Q19EOldChange202QE EPS|NewOldNevOldChangeNevOldChangeNevOldChangeACGL38.42BuyBuy39390%0.710.693%2.802.781%2502.9。0%AIG55.52BuyBuy57570%1.161 160%4.964.950%5.195 151%AU104.66NeutralNeutral1061060%1.601.64-2%9.049.13-1%95710.10-1%A
8、ON196 55NeutralMeutral1811810%1881880%9.109.100%10 2510.250%AX560.97Buy姐68671%1.271225%5.004.95n5 805.800%CB149.25NeutralNeutral1561541%2.642.65-1%10.7010.750%11.4811.55-1%HIG57.08Buy蚓65617%1.20129-7%5205.30-2%5 465.55-2%HC-CA126 23BuyBuy1331330%1.90195-3%6.756.80-1%8 198.25-1%JRVD48.00NeutralNeutra
9、l39390%0.600 600%2.682.651%2 892.851%MMC102.03NeutralNeutral102984%1.061.12-5%4.614.70-2%5.045.203%RE257.59NeutralNeutral2572522%6716.179%24.8424.302%25 5325.51OXRNR184.73NeutralNeutral1661660%3.673.476%13.4613.252%152115.200%TRV153 45NeutralNeutral1521464%2.052.021%11.1311.100%11斑11.801%WLTW19525Bu
10、yBuy2202029%1.781 780%10.9710.970%12 0512.05OXWRB67.79SellSell61569%0.650.617%2.832.676%3.102.955%This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 31. UBS does and seeks to do business with companies covered in its research reports. As
11、 a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Personal auto pricing continues to decelerateWith most companies oper
12、ating at or better than profitability targets, competition for market share continues to push down pricing. Aggressive pricing seems to be led by the mutuals and some smaller regionals in the independent agent channel. The CPI auto insurance inflation index has continued to decelerate and at less th
13、an +1% in May, it indicates that written pricing is now likely below loss cost inflation. Note that CPI does control for changes in vehicle age, type, coverage limits, miles driven, etc, so it is not a perfect measure of pricing. For example, insurers have pointed out that a shift in consumer prefer
14、ence to larger vehicles, which tend to cost more to insure, is not captured in CPI auto insurance inflation.Source: BLSFigure 13: Personal Auto Insurance Inflation sub +1% as of May, but.Source: BLS, Company reports 1 -implied auto gross premium 2-Avg premium per policy growth estimate 3-agency auto
15、 onlyFigure 14: .trajectory of reported pricing tends to follow CPI, but CPI is not a great indicator of actual pricing levelWe also note, as we detailed in our April PGR report (link), that favorable auto frequency trends are likely to persist and could even improve over the next few years as drive
16、r safety technology (often referred to as ADAS) increasingly penetrates the national fleet of private passenger vehicles, which takes 12 years to fully turn over. Industry studies have shown that ADAS technology is increasingly becoming standard feature equipment across manufacturers and our view is
17、 that the recent increase in auto physical damage severity reported by some insurers is reflective of the faster-than-expected rate of adoption, which ultimately should benefit insurers as frequency continues to decline as it did in the early 2000s as anti-lock braking and stability control became w
18、idely adopted.Figure 15: Auto frequency has been in secular decline for decades; short pops1 in frequency usually a result of regulatory changes or major economic transitionsFigure 15: Auto frequency has been in secular decline for decades; short pops1 in frequency usually a result of regulatory cha
19、nges or major economic transitionsBroad-based adoption of ABS and3 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018.24.8S.42 4.3.3.3.3.Auu nb L1-SE-POp_BdSource: ISO, UBS analysisPersonal auto underlying loss ratios continued to
20、improve y/y through 1Q19, reflecting rate earning in that was still ahead of loss trend. However, the rate of improvement decelerated and we expect that modest margin compression is possible in the back half of the year given that written pricing for the industry appears to have fallen below trend.
21、That said, we expect the continued favorable frequency environment to dampen the level of margin compression for the industry, and it is also plausible that increasing physical damage severity could cause rate deceleration to bottom and potentially firm somewhat. We estimate that PGRs personal auto
22、underlying loss ratio in through May in 2Q19 was 65.7%, down from 68.0% in 2Q18; a positive re-thru for personal auto insurers.Figure 16: Personal Auto Accident Year Loss Ratios x/Cat1Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q181Q19ALL172.4%73.3%72.3%71.6%66.9%67.5%66.1%68.0%65.0%66.8%66.8%67.6%6
23、5.3%GEICO80.4%80.9%83.6%79.7%81.6%82.2%83.4%82.4%81.9%78.8%78.8%76.7%77.0%HIG71.3%79.1%80.3%91.3%74.3%76.6%78.7%77.6%70.3%71.1%73.3%78.0%67.1%PGR272.1%74.5%75.5%75.5%68.4%71.2%71.3%71.6%67.6%68.0%69.2%71.7%66.8%TRV369.1%73.2%76.8%88.3%74.8%78.2%75.8%80.5%72.6%71.5%69.8%74.1%68.7%KMPR86.6%85.6%82.3%8
24、3.3%84.1%80.3%75.6%79.3%74.8%77.1%73.0%74.6%72.2%MCY71.2%72.1%71.5%71.7%72.5%71.3%71.4%74.0%71.8%69.9%69.3%75.9%71.6%Average74.7%77.0%77.5%80.2%74.7%75.3%74.6%76.2%72.0%71.9%71.5%74.1%69.8%y/y4.2%5.3%3.4%4.9%-0.1%7.6%29%-4.0%26%-3.4%3.7%-2.1%22%Stable growth for Insurance Brokers in 2Q19We are forec
25、asting an average organic revenue growth rate of 4.3% in 2Q19 for WLTW, MMC, and AON, modestly lower than the 5.0% average organic growth rate in 2Q18 for the five public brokers we track (Figure 17). Organic growth comps get more challenging for AON and MMC in 2Q19.Improved commercial lines pricing
26、 may be a modest tailwind to growth, however, we do not expect it to meaningful.Figure 17: Brokerage organic revenue growthSource: Company reports, Visible Alpha, UBSe.Brokers continue to face some foreign exchange headwinds in 2Q19, although per share impact will be lower than 1Q19. MMC has guided
27、to an FX headwind in the second and third quarters of $0.01-$0.02 per share, while WLTW has commented it expects a full-year impact of $0.15 from FX. We also expect FX to be a headwind for CBs earnings in 2Q19.Figure 18: Daily average FX rates (in USD per unit of foreign currency)Source: FactSet. MX
28、N calculated in thousands of pesos per USD; JPY calculated as number of yen per dollar.1Q182Q183Q184Q181Q192Q19% ChangeQoQYoYGBP1.391.361.301.291.301.29-1.3%-5.5%BRL0.30790.27820.25380.26270.26540.2553-3.8%-8.2%EUR1.231.191.161.141.141.12-1.1%-5.8%CAD0.790.770.770.760.750.75-0.6%-3.5%AUD0.790.760.73
29、0.720.710.70-1.7%-7.5%JPY*108.3109.1111.5112.8110.1109.9-0.2%0.8%MXN*53.451.652.850.652.152.30.4%1.3%UBS ResearchP&C Insurance: Earnings PreviewPIVOTALQUESTIONSreturn 个Q: What is driving estimate changes?UBS VIEWRevisions into the quarter are relatively minor and company specific (see page 19 for in
30、dividual company discussions). Losses from severe tornado/hail activity in April and May, paired with below average activity in June, should result in a normal to modestly-elevated 2Q catastrophe season. While the tornado count for the quarter is above the historical average and similarto 2011 level
31、s, we do not expect losses of the same magnitude (Joplin and Tuscaloosa) with the largest tornados being an EF4 in Dayton, OH and a series of storms in TX. PGR and ALL have already disclosed losses for these events. We believe that weather in Canada has been consistent with normal 2Q seasonality, wh
32、ich may result in more attritional losses y/y (minor weather in underlying), but an overall improved combined ratio. Reinsurers will have a light catastrophe loss quarter, driving upward estimate revisions. This will be partially offset by Typhoon Jebiloss development. Estimates have continued to mo
33、ve up, even in recent weeks. With $15 billion now the commonly-cited industry loss estimate.EVIDENCEALL and PGR have reported April/May catastrophe losses that are double the prior year period, however based on NOAA data, June catastrophe losses appear to be below average. Typhoon Jebi insured loss
34、estimates have now reached $15 billion, compared to $12 billion last quarter and initial estimates from several modeling firms in the $2bb to $6bb range.WHATS PRICED IN?Expectations are generally for a normal reinsurance cat quarter (vs. our expectations for lighter than normal).Estimate changes mix
35、ed for the quarterWe raised estimates for 6 companies and lowered estimates for 5 ahead of 2Q19 earnings, reflecting modestly higher catastrophe losses and lower catastrophe losses for reinsurers. For insurers with Life businesses, we increased DAC amortization assumptions for the quarter.Figure 19:
36、 Current Estimate and Price Target ChangesSource: FactSet, UBS estimates.lickerFrice Target2Q19E EF52Q19ConsensusUBSevs.ConsensusPrimary Drhrer of the ChangeNevOldChangeNewOldChangeACtL3939Q0.710.69310.667%A1G575701.161.161.133%ALl10610601.601.64-2%1.66-3%higher DAC amortization In lifeAX5686711.271
37、.221.31-3%CB15615422.642.65-1%2 592出IK-CA13313301.901.95-3%1.900%lower reseive releases in personal auto, modestl/ higher underling in HO, offset b/lower catsJRVR393900.600.600%0,66-9%MMC1029841.061.12-5%1.14-6%DE25725256.716.179：.6 306%RNR166166Q3.673.476%3.4S6%TB15214662.052.02235-13Xhigher PYD re
38、leases in personal auto mostl/offs eft by higher car lossesWllW220202181.781.781.752%WRB615650.650.613*0.626%modest margin expansion in Insurance d流n by pricing in E&5AOC18118101.881.8801.870%HIG656141.201.29-7%1.172%higher cert losses in personalRain, rain go away; Typhoon Jebi loss creep persists
39、into 2QIn September 2018, initial estimates for Typhoon Jeb pegged insured losses at $2bb to $6bb. Last quarter, industry estimates increased to $12bb, causing a number of reinsurers to take prior year reserve charges. In the past few days, reports have indicated that industry estimates are now nort
40、h of $15bb, up 25% from 1Q.Figure 20: Reported Typhoon Jebi losses by companySource: Company reportsReported Loss4Q18Revision1Q19RevisionCommentsACGL?$163Q cats of $58.2m predominantly Florence but included Jebi; $16m Jebi on industry losses of $12.5 to $13bAIG750-28Q* * * *reduced Jebi estimate in
41、4Qfor losses in Legacy segment; *1Q noted that increased Jebi loss estimates were ceded to reinsuranceAVC1133*4Qcall:Jebi iscontinuingtodeteriorate;*Jebi+Trami development,Jebi now assumes $12-13b industry eventrn52n* *$61m gross; $46 in Gl, $14 in Reins.; *explicitlysaid noJebiUDudevelopment on cal
42、lRE800estimate unchanged per 10-KRNR70net 3Qevents developed favorably in4QJnitial estimate assumed $llbWRB?*$39min3QcatsdrivenbyFlorenceandJebi; *reportedadverse development in Reinsurance in 1Q19Plenty of storm activity but insured losses appear to be manageableMonthly reporting from PGR and month
43、ly catastrophe pre-announcements from ALL suggest above-average April and May losses from convective storms for primary insurers. PGR April catastrophe losses were approximately double y/y and primarily driven by wind and thunder in TX. ALL similarly cited two wind/hail events in TX as accounting fo
44、r 70% April losses, which were up 33% y/y. We estimate PGR May cat losses to be 3x greater y/y when factoring in the stop loss recoverable. ALL May cat losses of $504m were a little more than double the prior year May with half the losses arising from one severe Midwestern tornado/hail event, which we believe to be the storm that included the Dayton, OH EF4 tornado. NOAA storm activity would indicate that June has been a below average catastrophe month, resulting in only modest revisions to our catastrophe loads for primary insurers. We do not expect that the April/May a