CFANY Insurance Industry Conference 2018 | CFA Institute | 19 March 2018 | CFANY Conference Center, 1540 Broadway – Suite 1010 New York, N.Y. 10036,USA

Equity capital markets finished 2017 on a strong a note. All major indices traded near or at their highs for most of the year and the S&P 500 managed to break its longest streak ever without a 3% intraday drawdown. In addition, market based measures of volatility remained at historical lows throughout the year, which further helped push the major averages higher on the positive fundamental backdrop of strong double-digit earnings growth, prospects of deregulation, and fiscal stimulus from tax reform. a sector basis, financials managed a comeback in early December and outperformed the broader market in 2017 as measured by the performance of the S&P 500 (20.03% vs. 19.42%). The sector underperformed for most of the year until consensus started to build around the success of a major tax overhaul. Indeed, the new tax legislation spurred financial indices higher. Within the insurance subsector, insurance brokers were the clear winner for the year outperforming the broader market by 147 bp (20.89% vs. 19.42%). We note this outperformance is driven to some extent by the “safety” component the group enjoys, which is, brokers have less downside cyclicality, are not exposed to catastrophe losses, and benefit from an improving economic outlook.

P&C stocks sold-off substantially in the wake of last year’s above-average hurricane season, but also made a comeback since; underperforming the S&P 500 by 654 bp in 2017 (vs 949 bp in mid-September). We note however, most P&C insurers had effective reinsurance programs in place which limited their losses to bearable levels. We believe the subsector is positioned constructively for 2018 as premium rates continue to increase and flow to the bottom line (especially in cat exposed property), with profitability being further aided by lower taxes and higher interest rates.

The performance of reinsurers reflected the severity of the 2017 hurricane season. Catastrophe loss estimates of $136B have shaped 2017 as one of the worst loss years on record for the global (re)insurance market. The subsector absorbed much of the industry’s catastrophe losses and underperformed by 21 percentage points.

Additionally, these losses come on the backdrop of constrained profitability from years of excess capital liquidity and relative benign catastrophe losses that have pressured reinsurance pricing downward. Historically, such a combination of factors would have led to a widespread upward spike in pricing, however, 2018 January 1 renewals have been generally orderly, which seems to indicate that secular trends are at play rather than cyclical forces, which further dampens the subsector’s outlook.

The SNL U.S. Insurance index increased 21.29% in 2017, compared with 20.03% for the S&P 500 Financials and 19.42% for the S&P 500. The top five best performing stocks in the SNL Insurance index in 2017 included: Trupanion, Inc. (TRUP), Centene Corp. (CNC), eHealth, Inc. (EHTH), Fidelity National Financial (FNF), and NMI Holdings, Inc. (NMIH). The top five best performing large cap stocks (over $5 billion) in 2017 included: Centene Corp. (CNC), Fidelity National Financial (FNF), Progressive Corp. (PGR), Anthem Inc. (ANTM), and First American Financial Corp. (FAF).