Property &Casualty Insurance:Commercial P&C Insurance Price Declines Accelerate In 1Q16

Commercial P&C insurance price declines accelerated in 1Q, according tothe most recent CIAB survey published today. On average, P&Cinsurance prices declined 3.7% in 1Q16 versus a reduction of 2.8% in4Q15, 3.1% in 3Q15 and 3.3% in 2Q15. The 1Q decline in rates is thelowest level in 5 years and probably worse than investors expect after thepace of rate decreases slowed the past two quarters. We expect pricedeclines to persist over the next 1-2 years driven by excess capacity andestimate that price declines could reach mid-single digits in 2016.

    Large accounts continue to be the most competitive with prices down4.6%, while middle market and small account pricing declined by 4.4%and 2.1%, respectively. Continuing the trend of the past year, P&Cinsurance prices fell across most lines with the exception of commercialauto (+3.6% vs +2.7% in 4Q15).

    Pricing trends deteriorated at major carriers as well during 1Q. Forexample, TRV’s Business Insurance renewal prices turned negative at-0.1% vs +0.5% in 4Q, and is the first time in 5 years it was negative.Notably, rates at TRV are higher than the overall market because it isbased on renewal pricing and excludes new business.

    We expect the P&C insurance industry’s excess capital to continue togrow following several years of low catastrophe losses, which couldresult in further price declines. We estimate the U.S. P&C insuranceindustry is overcapitalized by $200bn, which is equivalent to fourHurricane Katrinas.

    We are mixed on the P&C insurance sector. Near term the sector couldbenefit from its defensive nature and lower interest rate exposure thanthe rest of financials. We also expect further industry consolidation asinsurance companies seek to deploy growing amounts of excess capitalin the face of weaker pricing and low investment returns. This trendcould provide a support level for valuations in the intermediate term.Long term, however, lower P&C prices and slowing reserve releases areheadwinds. The J.P. Morgan commercial P&C (re)insurance indextrades at 1.26x BV, above the historical median of 1.1x.·。

    Our top picks are companies with less leverage to softening P&Cinsurance prices and stronger growth opportunities including AON, ALL& ACGL.