財險展望：強(qiáng)調(diào)價值從穩(wěn)定到惡化的基本面

1、Global Research25 January 2019Equities2019 Outlook: P&C InsuranceInsurance, Property & CasualtyNorth AmericaEmphasis on value with stable-to-deteriorating fundamentalsWe prefer value stories in commercial lines in 2019AIG and HIG were the worst performing names in or coverage in 2018 (down 34% and 2

2、1%, respectively). We believe consensus estimates at AIG have finally bottomed out and its shares will re-rate higher as initiatives to improve General Insurance underwriting margins prove out. For HIG, we see its shares re-rating higher on better than expected underlying underwriting margins in 201

3、9 and excess capital deployment shifts to debt paydown and share buyback (from M&A).IFC the best personal lines play with better pricing dynamics in CanadaWe are cautious on U.S. personal lines, but in Canada personal auto insurance is in a hard market. IFC addressed accelerating loss trend issues 1

4、2 18 months before the rest of the industry, and is now in position to gain market share. We see continued underwriting margin improvement and accelerating top line growth at IFC in 2019 leading to upward EPS estimate revisions.Overall, commercial lines appear stable, but risk is to the downsideWe e

5、xpect commercial lines insurance pricing to be stable (low single digit increases) through the beginning of 2019 and begin to moderate in 2H19. Price increases coupled with rate-like exposure growth should be in line with loss trend, yielding stable underlying margins. There is some risk of accelera

6、ting loss trend, which could result in worse than expected underlying margins and adverse loss reserve development. Reinsurance should improve, especially at 4/1 and 6/1 renewals, but we question if it can improve enough to turn sentiment given persistent fundamental headwinds.Pessimistic on persona

7、l as auto rate decelerates, home margins will take time We expect the underwriting margin improvement the industry has been experiencing the last 18 months to stabilize and likely deteriorate in 2019. Most companies are now achieving target underwriting margins (or better) and are looking to regain

8、market- share resulting in price competition. Moreover, if claims frequency normalizes and the industry continues to see elevated PD severity, we may see underwriting margins compress again.Figure 1: We anticipate broadly stable underlying operating ROEs in 2019 in the low-double digitsOperating ROE

9、A/Y Oper. ROE x/cats15%13%11%9%7%5%3%1%-1%Brian MeredithAnalyst HYPERLINK mailto:brian.meredith brian.meredith+1-212-713 2492Seth Rosenberg Associate Analyst HYPERLINK mailto:seth.rosenberg seth.rosenberg+1-212-713 25272012201320142015201620172018e2019eSource: FactSet, Company reports, UBSe. Note: H

10、istorical average is of current coverage universe excl. PGR and ALL and incl. NAVG HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 25. UBS does and seeks to do business with companies c

11、overed 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. Investors should consider this report as only a single factor in making their investment decision.ContentsOUR THESIS IN PICTURES3UBS

12、Research THESIS MAP4PIVOTAL QUESTIONS5 HYPERLINK l _TOC_250004 Q: Can commercial pricing keep up with loss cost inflation?5PIVOTAL QUESTIONS15 HYPERLINK l _TOC_250003 Q: Will price competition and rising loss trend hurt personal auto margins in 2019?15PIVOTAL QUESTIONS18 HYPERLINK l _TOC_250002 Q: H

13、ow will macro environment impact P&C insurers performance?18PIVOTAL QUESTIONS21 HYPERLINK l _TOC_250001 Q: Which stocks will perform best in 2019?21 HYPERLINK l _TOC_250000 2019 Top picks HIG, AIG and IFC21Brian MeredithAnalyst HYPERLINK mailto:brian.meredith brian.meredith+1-212-713 2492Seth Rosenb

14、erg Associate Analyst HYPERLINK mailto:seth.rosenberg seth.rosenberg+1-212-713 2527P&C InsuranceUBS ResearchOUR THESIS IN PICTURESreturn Figure 2: P&C insurance stocks are defensive and generally have an inverse correlation with interest ratesFigure 3: given current multiples, P&C stocks appear fair

15、ly valued and an okay entry as a defensive play110%105%100%95%90%85%80%90.0%88.0%86.0%84.0%82.0%80.0%78.0%76.0%74.0%72.0%70.0%Source: FactSetJan-14Jan-15Jan-16Jan-17Jan-18Jan-19 Rel. P/E to Financials (left)Rel. P/E to S&P500 (right)Source: FactSetFigure 4: Stable commercial lines margins in 2019 wi

16、th some risk of accelerating loss trend.Figure 5: Nearing end of personal auto margin expansion as pricing moderates and loss trend accelerates.80.0%10.0%75.0%70.0%5.0%65.0%60.0%0.0%55.0%20142015201620172018e2019eCommercial NA (AIG)Commercial NA (CB)Commercial Lines (HIG)BI + B&SI (TRV) Insurance (W

17、RB)-5.0%2Q08 2Q09 2Q10 2Q11 2Q12 2Q13 2Q14 2Q15 2Q16 2Q17 2Q18Margin Expansion/(Compression)Loss TrendPricing Source: Company reports, Visible AlphaSource: ISO, BLSFigure 6: For 2019, we see the best risk/reward in value commercial lines names HIG and AIG. We also like IFC due to a favorable pricing

18、 environment for Canadian auto.Source: FactSet, UBSeP&C InsuranceUBS Research THESIS MAP a guide to our thinking and whats where in this reportPIVOTAL QUESTIONSQ: Can commercial pricing keep up with loss costs and what does that mean for margins?We expect commercial lines insurance pricing to be sta

19、ble (low single digit increases) through the beginning of 2019 and begin to moderate in 2H19. Price increases coupled with rate-like exposure growth should be in line with loss trend, yielding stable underlying margins. We see some risk of accelerating loss trend, which could result in worse than ex

20、pected underlying margins and adverse loss reserve development. For reinsurance, 1/1/2019 renewals for property catastrophe reinsurance were disappointing while casualty reinsurance improved modestlyQ: Will price competition and rising loss trend hurt personal auto margins in 2019? HYPERLINK l _book

21、mark4 more We expect the underwriting margin improvement the industry has been experiencing the last 18 months to stabilize and potentially deteriorate in 2019. Currently personal auto pricing is running modestly above loss trend for personal auto insurers driven by the impact of high single digit p

22、ricing and very favorable claims frequency the last 18 monthsQ: How will macro environment impact P&C insurers performance?more While a higher interest rate environment is generally a fundamental positive for property-casualty insurers earnings and ROEs, other financials (Life and Banks) are more le

23、veraged to yields and typically outperform. Additionally, property-casualty insurers fundamentals are less economically sensitive than other financials and are viewed as economically defensive within financials. Additionally, if concerns over credit escalate, P&C insurers should outperform given hig

24、h quality investment portfolios and lower invested asset leverage.Q: Which stocks will perform best in 2019? HYPERLINK l _bookmark8 more Our top picks for 19 are AIG, HIG and IFC. We believe consensus estimates at AIG have finally bottomed out and shares should re-rate higher as management delivers

25、on its forecast of General Insurance underwriting margin profitability in 1Q19. For HIG, we see its shares re-rating higher as commercial lines underlying CRs remain stable in 2019, the NAVG acquisition is modestly earnings accretive and share repurchase could resume as early as 2H19. IFC is heading

26、 into a period of market- share gains in personal auto as it was 12-18 months ahead of the rest of the industry in addressing loss cost issues, which should drive upward estimate revisions. HYPERLINK l _bookmark13 more UBS VIEWWe are Neutral on the P&C Insurance space in 2019, favoring commercial li

27、nes insurers over personal lines insurers and reinsurers. With relatively stable fundamentals and reasonable relative valuations, we see the group as a good defensive play if macroeconomic and/or credit conditions deteriorate. Fundamentals for P&C insurance are relatively stable heading into 2019. P

28、ricing for commercial lines is likely to remain in the low single digits, roughly in line with loss trend resulting in stable underlying margins, but, moderating loss reserve releases. Personal lines insurers are likely to see stable to deteriorating margins as pricing becomes more competitive and l

29、oss trend accelerates. While reinsurance pricing is likely to improve in 2019, we believe the level of price increases will be disappointing.EVIDENCEP&C outperformed the S&P Banks and Life indices ( HYPERLINK l _bookmark10 Figure 33) during Decembers market route, but the Jan. rebound and strong ban

30、k earnings have brought the rate-sensitive segments back into favor with P&C insurance underperforming.WHATS PRICED IN?P&C insurers appear fairly valued relative to the market and other financials given an uncertain macroeconomic backdrop and relatively stable fundamentals. The market is forecasting

31、 stable-to- improved margins in commercial lines and modest deterioration in personal lines.P&C InsuranceUBS ResearchPIVOTAL QUESTIONS HYPERLINK l _bookmark0 return Q: Can commercial pricing keep up with loss cost inflation?UBS VIEWWe expect commercial lines insurance pricing to be stable (low singl

32、e digit increases) through the beginning of 2019 and begin to moderate in 2H19. Price increases coupled with rate-like exposure growth should be in line with loss trend, yielding stable underlying margins. There is some risk of accelerating loss trend, which could result in worse than expected under

33、lying margins and adverse loss reserve development. For reinsurance, 1/1/2019 renewals for property catastrophe reinsurance were disappointing while casualty reinsurance improved modestly. Property cat reinsurance pricing should improve at 4/1 and mid-year renewals where more loss impacted accounts

34、renew. However, we see a risk to mid-year renewals being disappointing as alternative capital capacity potentially increases after being down at 1/1 renewals.EVIDENCE4Q18 pricing surveys indicated commercial lines rates are up around 2%, and our most recent UBS agency survey predict pricing to modes

35、tly slow in the beginning of 2019. Reinsurance broker January 1, 2019 renewals reports showed property catastrophe reinsurance pricing as roughly flat with 2018 (depending on geography), while casualty reinsurance terms and conditions improved.WHATS PRICED IN?Consensus expectation for commercial lin

36、es insurers is for underlying loss ratios to be flat to up modestly in 2019 (except for AIG which is expected to improve). Reinsurers outperformed going into 1/1/19 renewals but have given some back YTD on disappointing renewals.Commercial pricing firmed in 18, will 19 experience stability or serve

37、as a tipping point?U.S. Commercial lines pricing firmed over the course of 2018, with most pricing surveys and company statistics indicating that pure rate increases grew at about+2% y/y, versus flat or negative in 2017. Coupled with the strong economy and exposure growth, carriers generally reporte

38、d renewal premium change in the 4- 5% range, putting written rate close to, or slightly ahead of, loss trend. While that could produce slightly better margins in 2019, we note that there are several loss trend concerns that lead us to remain cautious as to whether that improvement will materialize,

39、or will be sustainable.At current levels, commercial lines pricing is likely to remain stable in 2019. This is consistent with the most recent UBS Evidence Lab HYPERLINK /shared/d2RoLYUX7p6IKjf agent survey, which predicts stable to modestly lower pricing through the first quarter of 19. As we discu

40、ssedFigure 7: Cmcl. Lines Pricing Y/Y15%10%5%0%-5%-10%-15%-20%CIABMarketscoutCLIPSin HYPERLINK /shared/d2O7Q13G6aF20L4 our recent report on workers compensation insurance, rates in that line appear likely to deteriorate further as a result of continued cuts in state-mandated or advisory rate filings

41、 across the country, and increased competition. Outside ofSource: MarketScout, Council of Insurance Agents and Brokers, Towers Watsonworkers compensation insurance, we see most lines as stable to modestly increasing. We expect commercial auto pricing to remain elevated given current underwriting res

42、ults and adverse reserve development, but current pricing is already in excess of trend and it is unclear whether recent bodily injury severity issues at TRV and THG will appear in others books and drive pricing higher. PGR, the largest commercial auto writer by DWPs, has not shown evidence of sever

43、ity issues and continues to generate healthy margins.Figure 8: Monthly commercial lines pricing by LOB excluding workers compensationFigure 9: Monthly workers compensation pricing6%5%4%3%2%1%0% Commercial Auto BOP GL Commercial Property Umbrella1%1%0%-1%-1%-2%-2%-3%-3%-4%-4% WCSource: IVANSSource: I

44、VANSRecent company commentary indicating some price moderationCompany reported statistics have lost momentum after several quarters of sequential improvement and first-to-report TRV showed further deceleration in 4Q results. Renewal Premium Change at TRV, Liberty and HIG, the second, third and ninth

45、 largest writers of commercial lines, respectively, have decelerated q/q. At the same time, the pace of increases slowed at CB, the largest commercial underwriter by DWPs, and at several regionals including SIGI and THG. Importantly, the pricing resistance was not only a result of the soft workers c

46、omp environment. HIG provided an ex workers comp statistic that also showed sequential decline, and commentary from TRVs CEO in 3Q suggested that their Business Insurance rate excluding workers comp would have also been down a few tenths of a point. TRV, which provides an annual outlook for its dome

47、stic Business Insurance renewal premium change, expects increases in 19 to be consistent with 18 levels, which is a less optimistic view compared to the positive and higher outlook provided throughout 2018. TRV 4Q18 RPC of +4.8% fell back to 1Q18 levels, and pure rate of 1.6% was the lowest level si

48、nce 4Q17. We note that in 1Q18, management described RPC as getting close to matching loss trend, thus, at this level, we do not anticipate margin expansion and see compression as a risk if loss trends deteriorate.Figure 10: Company reported commercial pricing statistics6.0%5.0%4.0%3.0%2.0%1.0%0.0%-

49、1.0%3Q174Q171Q182Q183Q184Q18HIG -Std. Cmcl LinesHIG - Std. Cmcl Lines ex WC TRV - Business Insurance RPC (ex Nat. Act)CB - Middle Market Rate + Exp. LibMut - Dom. Natl InsuranceTHG - Core Commercial LinesSource: Company reports, UBS analysisModerating exposure growth could be a pricing headwindWe al

50、so note that RPC has increasingly been driven by exposure growth in recent quarters due to the strong economy. TRVs renewal premium change outlook, which currently calls for consistent RPC y/y, could assume lower pure rate being offset by higher exposures. Should the economy begin to slow in 19, we

51、would expect exposure growth to decelerate, given that it has been running above historical average recently. While exposure growth does not benefit loss ratios one- for-one, it does provide some benefit.Can loss cost trends remain benign for another year?The overall commercial loss cost environment

52、 has been relatively benign in recent years. Commercial auto remains a challenge, but otherwise, the major lines (Property, CMP, GL, Professional and WC) have generally developed better than company expectations as evidenced by favorable reserve releases HYPERLINK l _bookmark1 (Figure 11). We see so

53、me risks that loss cost inflation picks up in 2019, potentially putting pressure on underwriting margins.Figure 11: Company reserve releases through the first nine months of 18Workers CompFavUnfavCmrl AutoFavUnfavFavCMPUnfavFavGLUnfavCmrl PropertyFavUnfavProf. LinesFavUnfavAIGXCBXXCNAXXXCINFXHIGXTHG

54、XLibertyXSIGIXTRVXX*WRBZURNSource: Company reports, UBS analysis *TRV adverse GL includes A&E charges, unclear if fav. excl. A&E pending release of the 10-KWhile still benign compared to long-term averages, several Insurance carriers have mentioned increased signs of tort (social) inflation, both in

55、 terms of a higher percentage of claims where an attorney is involved as well as higher pain and suffering awards. We have noted in the past the tendency for litigation costs torise following periods of Democratic presidential control. As Democratic nominations tilted the balance of federal courts i

56、n favor of plaintiffs the past five years, we have gradually seen a rise in tort inflation as a percentage of GDP. That said, the balance of power has shifted back to the GOP for the first time since 2012, and with a more conservative Supreme court, this analysis would indicate that tort inflation s

57、hould remain relatively modest for the next several years HYPERLINK l _bookmark2 (Figure HYPERLINK l _bookmark2 12).Figure 12: Tort costs typically lag bias of federal courts1.0%Commercial Tort Inflation/GDP0.9%50%Balance of courts has shifted back to the GOP, but given historical lag, expect tort c

58、osts to get worse before they improve40%30%0.8%20%Federal Court Bias10%0.7%0%0.6%-10%-20%0.5%-30%-40%0.4%197619811986199119962001200620112016-50%Democrat/Republican BiasTort Costs % of GDPSource: Towers Perrin, UBS analysisGeneral inflation, political actions on tariffs and immigration, and demand s

59、urge as a result of two years of relatively heavy catastrophe losses, could be putting upward pressure on property claims severity. While still below historical averages, data measuring construction costs is trending higher and may be a contributing factor to some of the abnormally high large loss a

60、ctivity that many commercial insurers highlighted in 2018.Figure 13: Measures of construction materials and labor have been trending up since the 2016 election9.0%7.0%5.0%3.0%1.0%-1.0%PPI Finished Goods Less F&EConstruction Cost IndexSource: Bureau of Labor Statistics, Engineering News-RecordAs we d