1、Equity Research 19 February 2019 CORE Barclays Capital Inc.and/or one of its affiliates does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.In
2、vestors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST CERTIFICATION(S)AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 64.Restricted-Internal U.S.Insurance 4Q Recap/Outlook:P&C Prospects Improving while Life Insurance Falters P&C Outlook Improv
3、ing,At Least for Top-Tier Insurers.P&C re/insurers 4Q results were marred,as expected,by Hurricane Michael and record-level California wildfire catastrophe losses.Even so,commercial P&C trends are likely modestly improving with favorable underlying underwriting margins at least for top-tier insurers
4、 including CB,TRV and ACGL.On the other hand,AIG showed few signs of stabilization in 4Q and continues to face downward earnings revisions.Separately,Personal lines results remain strong although rate gains are moderating.Property catastrophe reinsurance rates were flat in January 19 despite the wor
5、st two-year period for global catastrophe losses on record,although this situation may tighten as the year progresses.Commercial P&C Pricing Appears to Be Improving.The pace of renewal rate change in bellwether TRVs business insurance unit was mostly unchanged q/q,although the broader pricing measur
6、e based on CIAB data continues to improve.Based on our proprietary early 19 Commercial Insurance Buyers Survey,large account P&C market conditions are on the cusp of tightening the by the most in five years,which we think bodes well for primary commercial insurers.Our OW-rated P&C stocks include Ber
7、kshire Hathaway(favorable positioning to higher short-term rates,and potential for accretive acquisitions as well as share buybacks),Allstate and Progressive(strong earnings trends in auto and home insurance),Chubb(core global P&C holding with superior franchise value),and Arch Capital(tailwinds fro
8、m mortgage insurance as well as top-tier P&C franchise).Life Insurers Challenged.As expected,4Q results were noisy including the impact of volatile equity markets in late 2018.Bellwether life insurer valuations remain compressed with a median P/E of 7x.However,its difficult to find fundamental catal
9、ysts that would cause the life stocks to re-rate higher.For example,a sub-3%yield on 10-year US Treasuries,a flat yield curve,and high beta are viewed as factors in the substantial de-rating of life insurer valuations.Some investors might consider locking in profits on any strength in the life insur
10、ance stocks.We Continue to See Value in PRU,UNM,LNC.PRU has EPS power of$13 based on our estimates,and its current P/E of 7x looks attractive.The company has delivered consistent results in its annuity,asset management,and international businesses.UNM should benefit from improving employment trends.
11、Legacy long-term care exposure is a concern,but we believe this is already discounted in UNMs valuation.UNM continues to deliver ongoing share buybacks and dividend increases,and is currently valued at 6.5x earnings.LNC has delivered solid results in its US-focused annuity and life insurance busines
12、ses along with accretive acquisitions.The company has a robust share buyback program and group insurance results are recovering.LNCs current valuation of 6.6x earnings has upside potential,in our view.EARNINGS REVIEW U.S.Insurance/Life NEUTRAL Unchanged U.S.Insurance/Non-Life NEUTRAL Unchanged For a
13、 full list of our ratings,price target and earnings changes in this report,please see table on page 2.U.S.Insurance/Non-Life Jay Gelb,CFA+1 212 526 1561 BCI,US Sue Lee+1 212 526 8190 BCI,US Andrew Karp+1 212 526 9015 BCI,US U.S.Consumer Finance Mark C.DeVries+1 212 526 9484 BCI,US Barclays|U.S.Insur
14、ance 19 February 2019 2 Summary of our Ratings,Price Targets and Earnings Changes in this Report(all changes are shown in bold)Company Rating Price Price Target EPS FY1(E)EPS FY2(E)Old New 14-Feb-19 Old New%Chg Old New%Chg Old New%Chg U.S.Insurance/Life Neu Neu U.S.Insurance/Non-Life Neu Neu Source:
15、Barclays Research.Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.FY1(E):Current fiscal year estimates by Barclays Research.FY2(E):Next fiscal year estimates by Barclays Research.Stock Rating:OW:Overweight;EW:Equal Weight
16、;UW:Underweight;RS:Rating Suspended Industry View:Pos:Positive;Neu:Neutral;Neg:Negative Barclays|U.S.Insurance 19 February 2019 3 P&C Insurance:Commercial P&C Rates Slightly Improving;4Q Results Hard-Hit by Catastrophe Losses In 4Q,P&C re/insurers results were negatively impacted by elevated catastr
17、ophe losses including the combined impact of Hurricane Michael and the California wildfires.CBs underlying underwriting results(before the impact of catastrophe losses and prior year reserve development)in the quarter were worse than our expectations although we view the full-year result as a better
18、 indicator of underlying trend.TRVs 4Q underlying underwriting results exceeded our outlook.Underlying results for personal auto insurers PGR and ALL were solid.AIGs P&C results were again disappointing in the quarter relative to our expectations.AIGs underlying combined ratio has now been unfavorab
19、le(99%or above)for the past six quarters.The company has committed to generating a P&C underwriting profit entering 2019,which we think could be a stretch goal.Insurance brokers organic revenue growth was better than our expectations for AON,WLTW,and AJG.Meanwhile BROs organic growth was below our o
20、utlook and down y/y reflecting tough comps.Accounting changes in 2018 meaningfully skewed y/y comparisons for the brokers in 2018,although the noise should no longer be a factor in 2019 and beyond.Slightly Increasing Commercial P&C Rates P&C market conditions are currently stable although on the cus
21、p of tightening the by the most in five years,in our view,following record-level insured catastrophe losses in 2017-18.In 4Q 18,renewal rate change in TRVs Business Insurance unit(an industry bellwether,in our view)was mostly unchanged at+1.6%vs+1.7%in the prior quarter.Workers compensation rate dec
22、lines remain a drag on the overall pricing result.Based on data from Travelers,which we view as a proxy for the US commercial P&C industry,commercial P&C rate increases have been in positive territory for the past ten quarters.We expect a continued favorable commercial P&C rate trend,although not as
23、 substantial as was seen during 2011-13(Figure 1).We attribute these strong rate trends between 2011-13 as a reaction to large catastrophe losses in 2011 and the US industrys negative underwriting cash flow.In the current environment,we expect industry underwriting cash flows to recover in 2018-19 w
24、hich means the pace of rate increases is unlikely to be as robust(Figure 2).Barclays|U.S.Insurance 19 February 2019 4 FIGURE 1 TRV Business Insurance Renewal Rate Change FIGURE 2 Industry Underwriting Cash Flow Source:Travelers,Barclays Research Note:1Q 2009 4Q 2011 data represent renewal premium ch
25、ange.Source:ISO,Barclays Research Note:Hard market years are shaded in blue.CB views commercial P&C pricing in 4Q 18 as similar to 3Q 18 with improvements seen in some lines of business.According to CB,US commercial P&C pricing is not improving enough for the company to see margin improvement althou
26、gh we view its current underwriting results as highly favorable.The companys overall pace of commercial P&C rate increases was unchanged q/q at+2.5%.HIG also observed positive commercial P&C pricing although at a slowing pace.However,workers compensation rates have continued to decline.FIGURE 3 Comm
27、ercial P&C Pricing Commentary Primary Commercial Lines Commentary TRV In 4Q,renewal rate change in TRVs Business Insurance unit was mostly stable at+1.6%versus 1.7%in the prior quarter.Notably,workers compensation rate declines continue to be a drag on the overall rate outcome.CB According to CB,US
28、commercial P&C pricing in 4Q 18 was up similar to 3Q 18.Rate increases for North America commercial P&C were+2.5%in 4Q 18.AIG According to AIG,General Insurance achieved an average 4%rate increase both in North America and International.North America public D&O and commercial auto achieved rate incr
29、eases in the low double digits,while commercial property saw mid single digit increases.HIG In 4Q,HIG observed slightly weaker price momentum in standard commercial P&C lines,driven largely by declines in Small Commercial workers compensation.According to HIG,rates in standard commercial lines incre
30、ased 1.5%in 4Q 18 compared to+1.8%in 3Q 2018.Source:Company data,Barclays Research (5.0%)(3.0%)(1.0%)(2.0%)(1.0%)(1.0%)2.0%3.6%5.3%6.9%7.1%6.9%7.3%7.2%7.5%6.9%6.9%5.6%4.8%3.6%2.8%2.2%1.1%0.9%0.7%0.4%(0.1%)0.2%0.5%0.4%0.5%0.7%1.4%1.7%2.1%1.7%1.6%1Q092Q093Q094Q091Q102Q103Q104Q101Q112Q113Q114Q111Q122Q1
31、23Q124Q121Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q18($30)($20)($10)$0$10$20$30$40$50 20082009201020112012201320142015201620172018E2019Ein$bnNegative Underwriting Cash flow=Catalyst for Improved P&C Market ConditionsBarclays|U.S.Insurance 19 Februa
32、ry 2019 5 The insurance brokers also noted flat-to-slightly improved commercial P&C pricing trends,although workers compensation rates continue to face downward pressure.FIGURE 4 Insurance Brokers:P&C Pricing Commentary Commentary BRO According to BRO,commercial P&C rates were generally flat across
33、most lines in 4Q.Coastal commercial property insurance rates were generally flat depending on loss experience.Meanwhile,commercial auto continued to see rate increases,while workers compensation rates saw downward pressure.AJG AJ Gallagher said rate and exposure growth together contributed a little
34、over 1ppt to its organic growth in 3Q.According to AJG,US commercial auto and property insurance rate increases were 4%-5%in 4Q 18.Separately,casualty lines were up 3%,while workers comp rates were down 1%-3%.Source:Company data,Barclays Research A broader measure of commercial P&C insurance pricing
35、 increased 1.6%on average based on the latest data from the Council of Insurance Agents&Brokers(CIAB).This result in 3Q 18(latest data available)was mostly unchanged from a+1.5%increase in the prior quarter,and marked the fourth consecutive quarter of positive pricing increases.We attribute these mo
36、dest overall price increases to record-level insured catastrophe losses.In 3Q 2018,large account commercial P&C pricing(+1.6%)improved from+0.9%in the prior quarter and was positive for the third quarter in a row.Although it was a modest increase in large account pricing,this was the fastest pace of
37、 increase in five years.Medium-sized(+1.7%)commercial P&C pricing trends were mostly stable versus+1.8%in 2Q.Meanwhile,small-sized(+1.4%)commercial P&C pricing trends decelerated from+1.8%in 2Q 18 which we believe reflects increased competition.Please refer to our November 15,2018 report for more de
38、tails:U.S.Insurance/Non-Life:3Q 18 Steady Pace of Commercial P&C Price Increases FIGURE 5 Average Commercial P&C Rate Changes by Account Size FIGURE 6 Cumulative Index of Rate Changes by Account Size Source:The Council of Insurance Agents&Brokers Chart prepared by Barclays Research.Source:The Counci
39、l of Insurance Agents&Brokers Chart prepared by Barclays Research.-20%-10%0%10%20%30%40%4Q992Q004Q002Q014Q012Q024Q022Q034Q032Q044Q042Q054Q052Q064Q062Q074Q072Q084Q082Q094Q092Q104Q102Q114Q112Q124Q122Q134Q132Q144Q142Q154Q152Q164Q162Q174Q172Q18Small AccountsMid-Sized AccountsLarge AccountsFinancialCrisi
40、s2005 Hurricanes9/11Japan earthquakeChart prepared by Barclays ResearchHurricanes and wildfires-6%-4%-2%0%2%4%6%8%2Q113Q114Q111Q122Q123Q124Q121Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q18Average rates increase+1.6%in 3Q18901001101201301401501601701804Q9
41、92Q004Q002Q014Q012Q024Q022Q034Q032Q044Q042Q054Q052Q064Q062Q074Q072Q084Q082Q094Q092Q104Q102Q114Q112Q124Q122Q134Q132Q144Q142Q154Q152Q164Q162Q174Q172Q18Small AccountsMid-Sized AccountsLarge AccountsChart prepared by Barclays Research2005 Hurricanes9/11Financial CrisisJapan EarthquakeHurricanes and wild
42、firesBarclays|U.S.Insurance 19 February 2019 6 Stable Commercial P&C Market,Signs of Hardening Our proprietary Commercial P&C Insurance Buyers Survey,which we have been conducting since 2000(U.S.Insurance/Non-Life:Early 2019 Insurance Buyers Survey:Stable Market,Signs of Hardening,1/31/2019),indicat
43、es P&C market conditions are currently stable although on the cusp of tightening by the most in five years following record-level insured catastrophe losses in 2017-18.We view this as a more significant change than many are expecting.Insurers are showing signs of increased underwriting discipline,wi
44、th Chubb leading the charge(which supports our OW rating on its shares).Meanwhile,underwriting trends at AIG appear to be in flux which could mean its plan to improve P&C underwriting results could take even longer than anticipated.Major Insights from our Survey:Commercial P&C insurance prices are e
45、xpected to slightly increase(median increase is 2%)as of early 2019,which marked the highest pace of increase in over five years although with a wide range of outcomes.Nearly all those surveyed said the commercial P&C market is broadly stable.Around 85%of buyers said the catastrophe-exposed property
46、 insurance market is stable,although many indicated a bias toward hardening.Meanwhile,nearly two-thirds of buyers we surveyed are involved in multi-year P&C programs which has limited the magnitude of rate increases.Looking ahead,some buyers expect these deals to be less prevalent.Signs of Firming R
47、ates in a Mostly Stable Commercial P&C Insurance Market.Based on our survey results,the percentage of buyers expecting directionally higher P&C rates was at the highest level in over five years driven by commercial property insurance.Respondents expect an overall median P&C rate increase of 2%,which
48、 is the highest level since mid-2013 and an increase from 1%both six months and a year ago.Meanwhile,all but one respondent viewed the P&C market as stable,although more respondents indicated a bias towards hardening compared to six months ago.Examples of Increasing Underwriting Discipline.Many insu
49、rers are fiercely protecting their existing business from competition,particularly for large accounts with favorable loss experience and limited catastrophe exposure.Meanwhile,several respondents noted there have been signs of increasing underwriting discipline when targeting new business,particular
50、ly in catastrophe-exposed property insurance.Several buyers indicated Chubb was firmly holding the line on pricing.Underwriting trends at AIG still appear to be in flux reflecting relatively new management oversight as well actions the company has taken to improve returns.Mostly Stable Insurance Bro
