The Case For And Against More Caution In P&C Insurance

Analysts at Citi took recent pressure in Property & Casualty Insurance stocks so far in June and over the second quarter to reassess the firm's cautiously positive view on the sector.

Todd Bault and James Naklicki offered insight in to both the more cautious and more favorable perspectives.

3 reasons for more caution near term:

• "Pricing is declining in Commercial and Reinsurance, which is likely to continue;
• P&C stocks are more market-correlated post-crisis, which is a problem if markets stay challenged; and,
• other Financials like Banks and Life Insurance may be better opportunities should Financial stocks start doing better overall."

3 reasons why the near-term may be more favorable:

• Loss trends are still negative and reserve adequacy positive, suggesting near-term upside to EPS still seems more likely;
• the selloff makes all M&A more attractive in an environment where M&A prospects remain elevated; and,
• market reactions to earnings have been more WYSIWYG than classically cyclical, amplifying the positive aspects of the prior two reasons," the Citi analysts said.

Bault and Naklicki wrote the firm's Neutral-rated recommendations "look better here." Brokers are still the "clear" choice among the sector, but the analysts also highlighted "selective Buys still have best probability for multiple expansion."

Citi highlighted Broker plays as Marsh & McLennan Companies, Inc. MMC, Aon PLC and Arthur J Gallagher & Co AJG and Buy ratings as American International Group Inc AJG, AmTrust Financial Services Inc AFSI and Third Point Reinsurance Ltd TPRE. The firm's Neutral rated stocks are Chubb Ltd CB, Travelers Companies Inc TRV, XL Group plc XL, Axis Capital Holdings Limited AXS and RenaissanceRe Holdings Ltd. RNR.