CORRECTION: P&C AND SPECIALTY INSURANCE Q3/24 OUTLOOK
THE TD COWEN INSIGHT
IFC reports Q3/24 on Nov 5; DFY & TSU on Nov 6. Themes for Q3/24: a) strong underlying conditions across all segments, particularly personal lines, b) healthy, but moderating, growth in investment income supported by rates & portfolio growth, and c) record CAT losses for the traditional P&C players (IFC, DFY) driving a loss for IFC and breakeven for DFY. TSU EPS estimate $0.64 is below consensus.
Underlying fundamentals are strong across the P&C industry. Strong fundamentals are evident in our Q3/24E estimates where we have IFC's & DFY's underlying claims ratios remaining stable to declining y/y. Personal auto is particularly solid with the underlying claims ratio forecast to fall 250-500bps y/y. Firm pricing conditions support improved competitive positions for both IFC and DFY, good top line, and attractive combined ratios.
Record CAT losses are forecast to drive material losses in personal property. Excluding CATs and reserve development, we continue to forecast strong claims ratio supported by firm pricing conditions. While CAT losses do impact out BV forecasts, we expect the insurers to comfortably absorb the charges with no material impact on capital strength. We do not expect TSU to record material CAT losses in Q3 or Q4/24.
For TSU, our Q3/24 estimate of $0.64 is below consensus of $0.70. We also reduced our 2024-2026 estimates to reflect more moderate growth in US fronting. Our estimates reflect improved capabilities (admitted lines) and a good environment in excess and surplus lines, offset by actions to exit certain programs not meeting profitability hurdles. Our estimates have net earned premium growth (total company) slowing to 13% y/y reflecting a shift from a top line growth story to a profitability and book value compounder. In this respect, an 18%-plus ROE continues to support our 2.9x target P/B multiple.
Outlook on the P&C Insurers: IFC and DFY have delivered good relative performance over most time periods despite elevated CAT losses in 2023 and Q3/24. While we remain positive on the P&C insurance industry, we do acknowledge that valuation is looking stretched at this time, as it is for most financials. At ~3.0x for IFC and TSU; and 2.1x for DFY, P/B valuations are at or near peak levels, and reflect strong (or improving for DFY) ROE and book value growth. Reflecting the stretched valuations, we downgraded DFY to Hold from Buy in TD Cowen Research note published on March 22 entirely reflecting the diminished upside to our target price. We continue to rate IFC Buy. We initiated coverage on TSU with a Buy rating on September 19.
This version corrects incorrect target prices for DFY and IFC in Figure 1 and 14.