North America Equity Research

04 January 2021

P&C Insurance 2021 Preview

Commercial Re/insurance Prices & Auto Frequency
Tailwinds; Auto Competition & BI Claims Concerns

Our fundamental outlook for the P&C sector is upbeat, but stocks seem less P&C Insurance
enticing given their recovery in 4Q20. From a long-term fundamental Jimmy S. Bhullar, CFA AC
standpoint, we remain most constructive on brokers. Our long-term view of (1-212) 622-6397
personal lines carriers is positive as well, but we are concerned that increasing jimmy.s.bhullar@jpmorgan.com
competition in the auto line could pressure results in the second half of the year, Bloomberg JPMA BHULLAR <GO>
especially as the tailwind from favorable frequency moderates. Hardening Keith Cornelius
pricing presents a key near-term positive for commercial lines insurers and (1-212) 622-9517
reinsurers, but we feel that the benefit is mostly reflected in EPS forecasts, keith.cornelius@jpmorgan.com

sentiment, and valuation multiples. Also, we are skeptical of the sustainability of Pablo S. Singzon
(1-212) 622-2295
hardening reinsurance prices and remain cautious on reinsurers due to long-term
pablo.s.singzon@jpmorgan.com
structural headwinds facing the market. J.P. Morgan Securities LLC

 Increasing 2021 EPS estimates. We are raising 2021 EPS estimates for most
commercial and reinsurance carriers to reflect hardening of prices as well as
the improving economy. Also, we are raising our estimates for personal lines
insurers due to assumed favorable auto frequency in the near term. Our 2021
forecasts are above consensus for brokers and personal lines insurers (AON,
MMC, ALL, and PGR), but below for commercial lines and reinsurance carriers
(CB, HIG, TRV, ACGL, and RNR).
 We expect commercial re/insurance prices to firm and personal lines prices P&C Insurance 2021 Outlook
to soften further. As a result, underwriting margins for most commercial
re/insurers should improve considerably in 2021. Personal lines margins should Key Positives:
Firming comm. re/insurance rates
be robust in early 2021 as well, helped by favorable auto frequency, but an
Balance sheets and reserves strong
expected recovery in miles driven and increasing competition could pressure
Auto frequency a N-T tailwind
results in the second half of the year. Besides pricing, we expect investors to focus
on COVID-19 losses, especially for business interruption. We expect BI claims
to be modest overall, but insurers’ ultimate payouts depend on the courts. Key Negatives:
 We are upgrading HIG from Neutral to Overweight due to an expected Moderating PYD tailwind
stabilization of workers’ comp. prices, acceleration of share buybacks, and Uncertainty about COVID claims
reduced uncertainty about BI claims. HIG was one of the worst performing P&C Rising personal auto competition
stocks in 2020 and these factors should help narrow its valuation discount to the
group. Also, we are downgrading CB from Overweight to Neutral. Our
fundamental view of CB remains upbeat and we consider it the best-positioned Best Trade Ideas:
Top defensive long: AON
insurer to take advantage of hardening prices. However, the risk-reward in the
Short in weak economy: ACGL
stock seems less compelling given its recovery in 4Q20.
Top pair: long HIG, short TRV
 AON and HIG are our top picks. We expect AON to generate superior EPS
growth relative to its large brokerage peers over the next few years, helped by cost
synergies from the WLTW deal. Concerns about uncertainty related to the WLTW
deal are valid, but we expect any revenue dis-synergies to be more than offset by Please visit our Bloomberg page on
expense synergies. Among our Neutral-rated stocks, we prefer CB and are
cautious on PGR. Meanwhile, we remain downbeat on RNR (rated Underweight). JPMA Bhullar <GO>

See page 80 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered 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.
www.jpmorganmarkets.com
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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Equity Ratings and Price Targets

Mkt Cap Rating Price Target
Company Ticker ($ mn) Price ($) Cur Prev Cur End Prev End
Date Date
Allstate ALL US 33,748.51 109.93 NR — — — n/c
American International Group AIG US 32,612.60 37.86 N n/c 39.00 Dec-21 n/c n/c
Aon AON US 48,423.08 211.27 OW n/c 228.00 Dec-21 n/c n/c
Arch Capital ACGL US 14,645.10 36.07 N n/c 36.00 Dec-21 30.00 n/c
Chubb Ltd CB US 69,475.82 153.92 N OW 155.00 Dec-21 152.00 n/c
Hartford Financial Services HIG US 17,652.39 48.98 OW N 55.00 Dec-21 52.00 n/c
Marsh & McLennan MMC US 59,319.00 117.00 N n/c 116.00 Dec-21 n/c n/c
Progressive PGR US 57,874.46 98.88 N n/c 92.00 Dec-21 n/c n/c
RenaissanceRe RNR US 8,425.31 165.82 UW n/c 162.00 Dec-21 160.00 n/c
Travelers Cos TRV US 35,555.72 140.37 UW n/c 136.00 Dec-21 129.00 n/c
Trean Insurance Group TIG US 669.41 13.10 N n/c 17.00 Dec-21 18.00 n/c
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates. n/c = no change. All prices as of 31 Dec 20.

2
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table of Contents
J.P. Morgan P&C Insurance Coverage ...................................5
Sector Outlook Neutral ............................................................6
Adjusting EPS Estimates.........................................................7
Major Industry Themes ............................................................9
Key Topics of Focus in 2021 .................................................22
Valuations Reasonable, but Not Too Enticing .....................29
Allstate ....................................................................................31
American International Group ...............................................34
Aon ..........................................................................................38
Arch Capital ............................................................................43
Chubb Ltd ...............................................................................47
Hartford Financial Services ...................................................51
Marsh & McLennan.................................................................58
Progressive .............................................................................62
RenaissanceRe .......................................................................67
Travelers Cos..........................................................................71
Trean Insurance Group ..........................................................76

Index of Tables
Table 1: Summary of EPS Estimate Changes ...........................................................7
Table 2: J.P. Morgan versus Consensus EPS Estimates ............................................8
Table 3: 2020 Equity Market Fundraises for Incumbent Carriers ............................16
Table 4: 2020 Private Equity Fundraises for Incumbent Carriers ............................16
Table 5: Investment Portfolio Allocation Summary................................................20
Table 6: New Money Yields Dropped in 4Q20.......................................................21
Table 7: Book Value Sensitivity to Changes in Interest Rates.................................21
Table 8: 2020 Quarterly Disclosed COVID-19 Losses ...........................................26
Table 9: 4Q20 & 2021 Estimated J.P. Morgan Model Forecasts .............................32
Table 10: 4Q20 & 2021 Estimated Property-Liability Assumptions........................32
Table 11: 4Q20 & 2021 Estimated J.P. Morgan Model Forecasts ...........................39
Table 12: 4Q20 & 2021 Estimated Key Financial Metrics ......................................40
Table 13: 4Q20 & 2021 Estimated Operating Metrics ............................................44
Table 14: 4Q20 & 2021 Estimated Key Financial Metrics ......................................44
Table 15: 4Q20 & 2021 Estimated Operating Metrics ............................................48
Table 16: 4Q20 & 2021 Estimated Key Financial Metrics ......................................48

3
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 17: 4Q20 & 2021 Estimated Operating Metrics ............................................54

Table 18: 4Q20 & 2021 P&C Estimated Key Financial Metrics .............................54
Table 19: 4Q20 & 2021 Estimated P&C Commercial Growth Rates (y-o-y) ...........55
Table 20: 4Q20 & 2021 Estimated P&C Personal/Consumer Growth Rates (y-o-y) 55
Table 21: 4Q20 & 2021 Estimated Operating Metrics ............................................59
Table 22: 4Q20 & 2021 Estimated Key Financial Metrics ......................................59
Table 23: 4Q20 & 2021 Estimated Operating Metrics ............................................63
Table 24: 4Q20 & 2021 Estimated Key Financial Metrics ......................................63
Table 25: 4Q20 & 2021 Estimated Operating Metrics ............................................68
Table 26: 4Q20 & 2021 Estimated Key Financial Metrics ......................................68
Table 27: 4Q20 & 2021 Estimated Operating Metrics ............................................72
Table 28: 4Q20 & 2021 Estimated Key Financial Metrics ......................................72
Table 29: 4Q20 & 2021 Estimated Operating Metrics ............................................77
Table 30: 4Q20 & 2021 Estimated Underwriting Metrics.......................................77

Index of Figures
Figure 1: AON, MMC, WLTW, BRO & AJG Organic Growth (2008-3Q20) .........10
Figure 2: Motor Vehicle Insurance Loss Spread.....................................................11
Figure 3: Commercial Lines Pricing Firming, and Workers’ Comp. Seems to be
Bottoming.............................................................................................................12
Figure 4: Guy Carpenter U.S. Property Catastrophe Reinsurance y-o-y Change in
Rate on Line..........................................................................................................13
Figure 5: Reinsurance Industry Prior Year Development........................................14
Figure 6: Reinsurance Industry Prior Year Development........................................14
Figure 7: Global Insured Losses vs. % Change in Global Property Cat Prices .........15
Figure 8: P&C Industry Capital Bases....................................................................16
Figure 9: P&C Industry Capital Raise Allocation ...................................................16
Figure 10: Reinsurers’ ROEs vs. Cost of Capital....................................................17
Figure 11: P&C Industry’s Reserve Surplus (Deficiency) as % of Stated Reserves..18
Figure 12: P&C Industry Reserve Surplus (Deficiency) / Net Earned Premiums .....18
Figure 13: Industry Debt-to-Capital Summary .......................................................20
Figure 14: U.S. Commercial Property Price Changes .............................................23
Figure 15: Potential Distribution of COVID-19 Losses ..........................................24
Figure 16: Commercial Multi-Peril Market Share (2009-2019)...............................25
Figure 17: Y/Y Change in U.S. Miles Driven.........................................................28
Figure 18: Broker Organic Growth (2008 - YTD 2020)..........................................29
Figure 19: Broker Adjusted Operating Margins (2008 - YTD 2020) .......................29
Figure 20: P&C Insurance Average P/BV ..............................................................30
Figure 21: P&C Insurance Average P/Fwd PE .......................................................30
Figure 22: P&C Insurance Brokers Average P/Fwd PE ..........................................30
Figure 23: Workers’ Comp. Pricing Still Soft, but Seems to be Turning .................52
Figure 24: HIG P/B vs P&C Insurance Index P/B ..................................................53
Figure 25: HIG P/E vs P&C Insurance Index P/E...................................................53

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 Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

J.P. Morgan P&C Insurance Coverage

Price Price Upside 2021 2022 P/BV: JPM Estimates Street Estimates BV ex. AOCI Total BV Div. Mkt. Cap
Company Ratings 12/30/20 Target (Downside) P/E P/E Total Ex. AOCI 2021 2022 2021 2022 12/31/21 12/31/21 Yield ($, mil.)

Personal Lines
ALL $108.15 8.5 8.4 1.17 1.31 $12.75 $12.85 $12.56 $12.81 $82.74 $92.25 2.0% $32,885
PGR Neutral $97.41 $92 -5.6% 16.9 16.8 3.25 3.49 $5.75 $5.79 $5.60 $5.85 $27.90 $30.00 5.0% $57,014

Commercial / Multi-Lines
AIG Neutral $37.52 $39 3.9% 8.1 7.6 0.50 0.61 $4.63 $4.95 $4.36 $5.00 $61.91 $74.76 3.4% $32,324
CB Neutral $151.93 $155 2.0% 13.8 13.1 1.14 1.18 $11.01 $11.63 $11.47 $12.30 $129.02 $133.19 2.1% $68,577
HIG Overweight $47.94 $55 14.7% 9.1 8.5 0.91 0.95 $5.30 $5.64 $5.43 $6.04 $50.27 $52.75 2.7% $17,178
TRV Neutral $139.08 $136 -2.2% 13.5 12.8 1.19 1.28 $10.34 $10.90 $10.48 $11.34 $108.76 $117.36 2.4% $35,230

Reinsurance
ACGL Neutral $35.58 $36 1.2% 13.4 11.1 1.13 1.16 $2.65 $3.19 $2.79 $3.34 $30.66 $31.61 0.0% $14,446
RNR Underweight $164.27 $162 -1.4% 12.2 11.2 1.12 1.12 $13.46 $14.68 $14.95 $18.09 $147.16 $147.12 0.9% $8,347

Brokers
AON Overweight $206.71 $228 10.3% 19.2 17.2 $10.75 $12.00 $10.61 $11.82 0.9% $47,257
MMC Overweight $115.01 $116 0.9% 21.7 19.8 $5.30 $5.80 $5.21 $5.77 2.0% $58,332

Small Cap Brokers

GSHD Overweight $122.73 $85 -30.7% 94.1 59.9 $1.30 $2.05 $1.03 $1.53 0.0% $4,499
BRP Overweight $29.03 $31 6.8% 36.3 23.2 $0.80 $1.25 $0.83 $1.21 NA $2,591

Small Cap Carriers

NGHC $34.15 10.3 9.8 1.28 1.36 $3.30 $3.50 $3.24 $3.30 $25.14 $26.78 0.6% $3,875
KNSL Overweight $203.01 $200 -1.5% 56.4 50.7 8.06 8.53 $3.60 $4.00 $3.71 $4.23 $23.80 $25.20 0.2% $4,604
PLMR Overweight $86.90 $130 49.6% 33.5 27.6 5.11 5.23 $2.60 $3.15 $2.32 $2.87 $16.60 $17.01 NA $2,218
TIG Neutral $13.19 $17 28.9% 14.2 11.8 1.59 1.63 $0.93 $1.12 $0.93 $1.12 $8.10 $8.28 NA $675
WTRE Neutral $34.57 $35 1.2% 10.4 8.8 0.68 0.68 $3.33 $3.91 $3.67 $3.91 $50.59 $50.75 NA $687

Source: J.P. Morgan estimates, company reports, and Bloomberg Finance L.P.

5
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Sector Outlook Neutral

Our outlook for business fundamentals in the P&C sector is relatively upbeat,
but we believe that stocks are less compelling following the recovery in 4Q20.
The J.P. Morgan P&C Insurance
The P&C group underperformed the broader market and the financial services sector
Index declined 7% in 2020 versus
a 16% increase in the S&P 500
in 2020, but outperformed the life insurance group. In our opinion, firming
Index and a 5% decline in the S&P commercial re/insurance pricing and continued favorable auto frequency are notable
Financials Index. In 2019, the P&C tailwinds in the near term. Furthermore, we believe that the sector is better positioned
index increased 13% versus a 29% to withstand deterioration in the economy, a pullback in the equity market, or
increase in the S&P 500 Index and
sustained low interest rates than most sub-sectors within financial services. Valuation
a 29% increase in the S&P
Financials Index.
levels seems reasonable as well, although they are less compelling than they were
around mid-2020. Rising competition in the personal auto market, a diminishing
benefit from favorable reserve development, and a potential uptick in COVID-19
business interruption claims are our key concerns. Still, our overall bias towards the
sector is relatively constructive. Following are our highest conviction trading
recommendations for the next 6-12 months:

Best Short-Term Trading Ideas:  Best Long for defensively positioned investors: AON. We consider brokerage
Defensive long: AON the most attractive business segment within P&C insurance from a long-term
structural perspective. In addition, we believe that brokers are defensively
Pair: long HIG, short TRV
positioned if macro conditions deteriorate. Among large brokers, AON is our
Short in a recession: ACGL favorite stock. Concerns about the regulatory approval process for the Willis deal
are valid, but have created an attractive opportunity for investors willing to look
beyond the next few months. We anticipate revenue dis-synergies from the
transaction, but believe that management’s expense savings targets from the
transaction are overly conservative and will more than help offset adverse
impacts on revenues. Furthermore, the stock has underperformed its brokerage
peers recently, and relative valuation seems more attractive.
 Most compelling 6-to-12-month pair trade: Long HIG (Overweight), Short
TRV (Underweight). Both HIG and TRV face uncertainty related to potential
business interruption claims, declining workers' comp. prices, and a potential
recession and its impact on small and mid-sized businesses. However, these
concerns seem more reflected in HIG’s valuation than TRV’s as the former has
significantly underperformed in 2020 and trades at sizable discounts on both
P/BV and P/E. Although stabilization of workers’ comp. prices and less
uncertainty about BI claims would be positive catalysts for both stocks, we
foresee more upside in HIG. Furthermore, HIG has already announced a
resumption of share buybacks, which should enable management to take
advantage of its depressed stock price and drive superior BV growth (we expect
TRV to resume buybacks in 2Q21). Longer-term, we feel that TRV is more
exposed than HIG to the industry-wide headwind of elevated tort costs.
 Best short for investors with a negative macro stance: ACGL. In our opinion,
ACGL (rated Neutral) is a top-tier reinsurance and mortgage insurance franchise.
Despite our constructive view of the company’s market position, we feel that
Arch is more susceptible to an economic slowdown than other P&C re/insurers
and expect the stock to be pressured if macro conditions deteriorate. We expect
challenging housing market trends to pressure results in the mortgage insurance
business, which generates close to 90% of the company's underwriting profits and
over two-thirds of Arch’s overall income (based on results in recent years).

6
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Adjusting EPS Estimates

We are increasing our 2021 estimates for most carriers, reflecting higher than
previously estimated premium growth due to the benefit of firming pricing as well as
the economic recovery following COVID-driven shutdowns. Additionally, we
updated our models to reflect resumption of share repurchases by several firms.
Some of these tailwinds should be offset slightly by elevated assumptions for natural
catastrophe losses. Our 2021 and 2022 projections for most companies are higher
than previous levels. Meanwhile our 4Q20 revisions are more mixed. For large
brokers, we reduced our 4Q20 EPS forecasts slightly, but maintained our projections
for 2021 and beyond.

Table 1: Summary of EPS Estimate Changes

Per share amounts

4Q20E 4Q20E 2021E 2021E 2022E 2022E

(Old) (New) (Old) (New) (Old) (New) Reasons for Change

ACGL $0.44 $0.45 $2.43 $2.65 $3.02 $3.19 NT: slight reduction in cat loss estimates; LT: improved industry pricing and MI returns
AIG $1.09 $1.06 $4.61 $4.63 $5.05 $4.95 NT: healthy equity market offset by lower buyback assumption and less accretion due to higher stock price
ALL $3.44 $3.73 $11.74 $12.75 $12.00 $12.85 NT: reduced 4Q cat loss estimates; LT: increased personal auto margins due to lower frequency trends
AON $2.50 $2.48 $10.75 $10.75 $12.00 $12.00 NT: slight increase in 4Q20 compensation and benefits; LT: no change
CB $2.60 $2.82 $10.75 $11.01 $11.20 $11.63 NT: reduced 4Q cat loss estimates; LT: improved commercial pricing/margins and higher premiums
HIG $1.30 $1.31 $5.10 $5.30 $5.40 $5.64 NT: slight improvement in P&C margins; LT: firming commercial lines pricing
MMC $1.20 $1.17 $5.30 $5.30 $5.80 $5.80 NT: reduced 4Q margins; LT: no change
PGR $1.65 $1.65 $5.75 $5.75 $5.90 $5.79 NT: No change; LT: reduced personal auto margins due to increased competition
RNR $0.30 $1.90 $13.46 $13.46 $14.68 $14.68 NT: increased 4Q earnings to reflect low cat losses; LT: no change
TRV $2.80 $3.15 $10.34 $10.34 $10.90 $10.90 NT: increased 4Q earnings to reflect low cat losses and improved premium growth; LT: no change
Source: J.P. Morgan estimates.
Note: the “New” column is blank for periods with no change in estimates.

The major changes to our earnings models are as follows:

 Higher than previously assumed premium growth for commercial lines

insurers and reinsurers. We are increasing our premium growth outlook for
most underwriters, reflecting improved forecasts for global economic growth
following the rollout of COVID-19 vaccinations. Hardening pricing should
provide an incremental tailwind for most commercial re/insurers as well as for the
homeowners’ insurance line.
 Auto frequency to remain favorable in the next few quarters but the benefit
should diminish as 2021 progresses. Although we expect the global economy to
continue its gradual recovery from COVID-induced mandatory shutdowns and
social distancing mandates, we believe that a significant portion of the labor force
will continue to work from home, leading to depressed miles driven. This, in turn,
bodes well for personal auto frequency trends in the near term. However, a
gradual recovery in miles driven, coupled with increasing competition, should
result in lower (albeit still strong) margins in the second half of the year.
 Low new money yields to pressure investment income. We expect the Federal
Reserve to maintain the current target federal funds rate range at 0.0% to 0.25%

7
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

in order to help stimulate and support the post-COVID-19 economic recovery.

Consequently, we lowered our net investment income assumptions for many
underwriters for 2021 and beyond.

JPM versus Consensus

Our 2021 EPS estimates are above consensus for brokers and personal lines
insurers and below for most commercial lines and reinsurance carriers. We
believe that consensus 2021 estimates for ACGL, CB, HIG, RNR and TRV are
overly optimistic and reflect more bullish forecasts for pricing and underwriting
margins. Conversely, we believe that consensus projections for AON, MMC, ALL,
and PGR are too conservative. During a difficult 2020, the brokers demonstrated
their resiliency and ability to drive earnings growth despite recessionary headwinds
from the global pandemic. We anticipate that the brokers will enjoy tailwinds,
reflecting the gradual global economic recovery following the mass distribution of
COVID-19 vaccinations. For personal lines carriers, we expect near-term results to
continue to benefit from favorable auto frequency, which we believe is not fully
reflected in consensus projections.

Table 2: J.P. Morgan versus Consensus EPS Estimates

% Dif. refers to difference in JPM estimates and consensus projections

4Q20E 4Q20E % 2021E 2021E % 2022E 2022E %

JPM Cons Diff. JPM Cons Diff. JPM Cons Diff.

ACGL $0.45 $0.48 -6% $2.65 $2.79 -5% $3.19 $3.34 -4%
AIG $1.06 $0.89 19% $4.63 $4.36 6% $4.95 $5.00 -1%
ALL $3.73 $3.55 5% $12.75 $12.56 2% $12.85 $12.81 0%
AON $2.48 $2.45 1% $10.75 $10.61 1% $12.00 $11.82 2%
CB $2.82 $2.82 0% $11.01 $11.47 -4% $11.63 $12.30 -5%
HIG $1.31 $1.31 0% $5.30 $5.43 -3% $5.64 $6.04 -7%
MMC $1.17 $1.13 4% $5.30 $5.21 2% $5.80 $5.77 1%
PGR $1.65 $1.66 0% $5.75 $5.60 3% $5.79 $5.85 -1%
RNR $1.90 $2.34 -18% $13.46 $14.95 -10% $14.68 $18.09 -19%
TRV $3.15 $3.19 -1% $10.34 $10.48 -1% $10.90 $11.34 -4%
Source: Bloomberg and J.P. Morgan estimates (as of 12/30/20).

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Major Industry Themes

Our fundamental outlook for the P&C sector remains relatively upbeat, although our
views vary by sub-sector. From a long-term fundamental standpoint, we are most
upbeat on the brokers, followed by personal lines carriers. Our long-term view of the
commercial lines business is constructive as well, but we are cautious on reinsurers.
However, in the near-to-intermediate term, we feel that commercial lines and
reinsurers carriers are better positioned than personal lines insurers, especially given
hardening commercial re/insurance pricing and increasingly competitive personal
auto pricing. Favorable auto frequency bodes well for personal lines results in the
near term, but we expect margins to compress as the year progresses due to a
combination of increasing miles driven and declining prices. Brokers are well
positioned in the near term as well and are more defensive if the economy enters a
recession. Overall, P&C balance sheets remain strong and we feel that reserve levels
are adequate. Also, we believe that the group is less susceptible to macro
deterioration, an equity market correction, or sustained low interest rates than other
financial services sectors, especially life insurers and banks. Valuation levels seem
reasonable as well, although they are not as enticing following the group’s recovery
in 4Q20. A potential spike in business interruption claims presents a key risk for
commercial and insurance carriers, and while we feel that the chances of outsized
claims are low, insurers’ ultimate payouts will depend on the courts.

Brokers Well-Positioned Long-Term and Defensive N-Term

We view brokerage as a structurally superior business to underwriting, and feel
that brokers are more defensive in an uncertain macro and loss environment.
The brokerage business is capital-light, does not entail actuarial risk, and is less
susceptible to credit risk than insurance underwriting. Weaker economic conditions
pose as a headwind for brokerage top-line growth as well as for insurers. However,
we expect revenues and earnings for the brokers to fare better in a downturn than
results for underwriters. For instance, during the 2008-2010 recession, AON posted
organic growth of +2%, -1%, and flat, while MMC reported flat, -1%, and +2%. In
addition, brokerage margins were mostly steady during the last recession, and we
anticipate a similar trend in case of a recession in the next few years. Furthermore,
brokers are not susceptible to deteriorating credit trends, which we consider a key
potential headwind facing underwriters in 2021. Most importantly, brokers are not
exposed to the tail risk of outsized COVID-related claims (especially for business
interruption), a key concern for commercial insurers and reinsurers.

9
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 1: AON, MMC, WLTW, BRO & AJG Organic Growth (2008-3Q20)
10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

1Q20

2Q20

3Q20
MMC AON WLTW BRO AJG

Source: Company reports. WLTW was formally Willis Group (WSH) prior to acquisition of Towers Watson (TW).

Another factor driving our constructive view of brokers is that consolidating market
share has enabled P&C brokers to maintain pricing power, contrary to the trend of
declining fees and commissions in many other financial intermediary businesses (e.g.
stock brokerage, cash equities, and record-keeping/asset management) in recent
years. Also, business models at large brokers such as AON and MMC lend
themselves to natural margin expansion because they are usually able to increase
revenues without a commensurate uptick in expenses, helped by the scalable nature
of back-office personnel, rent/office, technology, and other costs. Both firms have
meaningfully expanded their operating margins despite a challenging pricing
environment in recent years. While there should be some margin degradation in the
near-term depending on the depth of a potential economic downturn, we expect this
to be relatively modest.

Personal Lines Structurally Better than CL or Reinsurance

We believe that personal lines is a better business than commercial lines and
reinsurance in the long run, but faces tougher pricing trends in the near term.
In our view, property & casualty insurance is a fairly commoditized business.
However, we feel that the personal lines segment of the market offers leading carriers
a greater opportunity to differentiate themselves on brand, distribution, customer
interface/digital capabilities, and underwriting acumen relative to commercial lines
and or reinsurance underwriters. As a result, even though margins and returns for the
overall personal lines business have historically been close to those for commercial
lines (and better than reinsurance), leading carriers in the personal lines market tend
to earn outsized returns compared with leading competitors in commercial lines or
reinsurance. Besides generating higher ROEs, we forecast personal lines insurers to
report less volatile results than underwriters in other sectors, implying even better
returns on a risk-adjusted basis. While pricing should fluctuate over time depending

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

on competitor behavior and loss trends, we expect it to be less volatile and more
disciplined than other segments of the P&C market over longer periods. Near term
results for personal lines insurers should continue to benefit from COVID-related
disruption, which poses a headwind for both commercial and reinsurance
underwriters. We do not view lower miles driven as a sustainable benefit in the long
run, but it should continue to help margins in the near-term. Furthermore, personal
lines carriers do not face the uncertainty of COVID-related claims, especially for
business interruption, which presents a major headwind for commercial lines
underwriters as well as for reinsurers.

On a cautious note, pricing in the personal auto market has gotten more
competitive over the past year, and we expect the trend to continue. Margins for
most personal lines insurers have been robust in the past several quarters, as the
impact of declining auto prices has been masked by a drop in miles driven. However,
we are concerned that prices might over-correct and margins could compress as miles
driven recover. Although the short-term nature of most contracts (6-12 months)
should enable insurers to adjust prices relatively fast if margins deteriorate, we
believe that results for personal lines carriers could disappoint in 2021, particularly in
the second half of the year.

Figure 2: Motor Vehicle Insurance Loss Spread

Prices derived from CPI data; loss costs derived using the weighted average of vehicle repair and medical
care costs
15.0%

10.0%
Year-ovver-year % chg

5.0%

0.0%

-5.0%

-10.0%

-15.0%

-20.0%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020
Motor vehicle insurance price Motor vehicle loss costs

Source: Bureau of Labor Statistics.

Pricing a Key Tailwind for Commercial Lines & Reinsurance

Our outlook for commercial and reinsurance pricing is positive, and we expect
hardening rates to lift margins and top-line growth for carriers in 2021. The
commercial lines market began exhibiting soft market pricing characteristics in 2012
as price increases began to moderate, eventually falling into negative territory in
2015. There were many contributors to the challenging pricing environment,
including the industry’s significant excess capital levels, an influx of capacity from
alternative capital providers, aggressive pricing by key competitors trying to
retain/gain share, and benign catastrophe losses. However, 2017-2018 marked a
turning point, as two consecutive years of historic catastrophe activity caused carriers
to reexamine their underwriting portfolios. Property losses suffered during this
period allowed carriers to hike prices across multiple product lines, including

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

casualty. Pricing has also benefited from several previously aggressive carriers (AIG,
Lloyd’s, QBE, FM Global, etc.) shifting their focus from market share to margins in
an effort to improve their profitability. The trend of rising prices has accelerated
recently, partly as uncertainty about COVID-related losses have caused re/insurers to
emphasize capital-preservation over growth. Still, despite significant hikes, we feel
that prices in many lines, especially property cat and commercial auto, remain
inadequate. Nonetheless, improving pricing bodes well for margins, revenues, and
earnings in insurers’ commercial lines operations.

Figure 3: Commercial Lines Pricing Firming, and Workers’ Comp. Seems to be Bottoming
Refers to CIAB premium pricing for various product lines
20%

15%

10%

5%

0%

-5%

-10%
1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

3Q17

1Q18

3Q18

1Q19

3Q19

1Q20

3Q20
Workers' Compensation Commercial Property Commercial Auto Average

Source: The Council of Insurance Agents & Brokers. Average rate includes Commercial Auto, Workers’ Compensation, Commercial
Property, General Liability, Umbrella lines.

As in commercial lines, after deteriorating steadily since 2006, reinsurance

pricing stabilized in 2017 and picked up further in 2018, 2019, and 2020.
Reinsurance underwriters should also benefit from the significant price hikes recently
enacted by their primary and retro peers. Over the past 2-3 years, reinsurance carriers
have lagged primary and retro counterparts in price increases due to abundant capital
supply despite large losses in 2017 and 2018. Regardless, both casualty and property
reinsurance rates should increase at a strong pace in the near term. Consequently,
even though our long-term view of the reinsurance business is downbeat, we expect
higher prices to help accident-year combined ratios in 2021 (ex. COVID-related
claims). Higher prices should also help expense ratios as reinsurers expand their
premium volumes. Still, we believe that the latest round of price hikes is not
sufficient to bring the reinsurance market to long-term rate adequacy given the
combined pressures of higher operating expenses, lower investment yields, and a
potential uptick in claims, especially in cat-exposed lines.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 4: Guy Carpenter U.S. Property Catastrophe Reinsurance y-o-y Change in Rate on Line
100%

80% 76%
68%

60%

40%

23%
20%
20% 15% 14% 14%
10% 8% 10%
7%
3% 3%
0%
0%
-3% -3% -3% -2%
-8% -6% -7% -7%
-9%
-13% -11% -11% -12%
-20% -18% -16% -17%
-20%

-40%

Source: Guy Carpenter.

We forecast both casualty and property reinsurance rates to increase at a strong

pace in the near-term. Reinsurers such as RNR have alluded to increased capital
costs, accelerating retro pricing, low investment yields, growing social inflation, and
net losses as the key drivers necessitating price hikes in casualty lines.1 Similarly,
property cat pricing has been improving recently, and we expect the trend to
continue, helped partly by elevated weather-related losses during the past few years.
The market was in the depths of a prolonged soft market prior to the 2017 and 2018
Atlantic hurricane season. Following the costliest back-to-back years for re/insurers
in 2017 and 2018 ($235 billion of combined insured losses per Aon Benfield), most
carriers have become more disciplined. Price hardening accelerated in 2020, partly as
most carriers have been in capital preservation mode due to uncertainty about
COVID-related claims and the ensuing weaker economy, which could drive losses in
investment portfolios. The decline in interest rates is contributing to higher prices as
well, although less so than the other drivers. Willis Towers Watson’s most recent
quarterly commercial pricing survey noted roughly double-digit property price
increases. Similarly, most re/insurers, including Scor, Munich Re, RenRe, AIG, and
Chubb, have become even more constructive on pricing in recent months.23 In our
view, property cat prices will continue to harden over the next year as re/insurers try

1
“RenRe's O'Donnell: Capital costs the driver for 2021 rate growth”. Robertson, Fiona. The Insurance
Insider. Sep. 15, 2020.
2
“Scor predicts ‘long-lasting’ P&C rate hardening as Covid drives demand”. The Insurance Insider. Sept.
9, 2020.
3
“Daily: Welcome to the Mont-E Carlo spin room”. The Insurance Insider. Sept. 9, 2020.

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 Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

to revive returns following record losses, both from weather-related events as well as
from the COVID-19 pandemic.

Other than high cat losses and COVID-related uncertainty, pricing is being helped by
capital trapped in insurance linked securities as well as a declining benefit from
favorable prior-year reserve development. We expect reserve development for
primary and reinsurance carriers to remain favorable in 2021 (other than for BI
claims), but the benefit is likely to moderate relative to levels in recent years.

Figure 5: Reinsurance Industry Prior Year Development Figure 6: Reinsurance Industry Prior Year Development
Combined Ratio Points $ in billions
6.0% $9.0

5.2% 5.2% $7.9

$8.0 $7.6
$7.4
5.0%
4.5% $6.9 $6.9 $6.8
$7.0 $6.5

4.0% 3.6% $6.0

$5.3 $5.4

3.0% $5.0
3.0% $4.4
$4.0

2.0% $3.0 $2.5

1.2%
$2.0
1.0% 0.7%
$1.0
$0.4
0.0% $0.0
2014 2015 2016 2017 2018 2019 1H20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1H20

Source: Willis Re. Source: Willis Re.

Key Views on Climate Change & We are skeptical of the sustainability of the hard market, but recent trends are
Cat Risks: encouraging and our outlook is incrementally positive. Unlike most hard markets
historically, which have been spurred by a dearth of capital and rising reinsurance
- Climate change is contributing to prices, the improvement in pricing in the past two years has been driven mainly by
increasing frequency and severity of high losses in several lines as well as greater discipline at several previously
catastrophe losses aggressive underwriters. We consider a shortage of capital as a more concrete driver
of lasting improvement in pricing and view greater underwriting discipline as a more
- All segments of the P&C market transient factor that could change relatively fast, particularly if the leading
(except brokers) affected by higher cat competitors lose considerable market share. Also, pricing trends vary considerably
losses, but reinsurers seem the most by line and account size, and it is not a broad-based hard market thus far. Still, the
exposed
firming pricing environment bodes well for commercial lines and reinsurance results
in 2021. Better pricing is a modest positive for organic growth at brokers as well.
- Property cat pricing poised to continue
firming in the near term
Our models forecast re/insurers’ margins and returns on property-related lines
- Industry structure is likely to preclude to improve, but remain lackluster nonetheless. Even with recent price hikes, we
a sustained hard market, especially in expect margins in cat-exposed lines to remain mediocre if cat losses stay close to the
reinsurance level in recent years. In our opinion, property cat coverage has been, and remains,
systemically underpriced. Prices have improved, but they are rising off of a low base
- Reinsurers to benefit from hard market and remain lower than prior to inception of the soft market. Meanwhile, cat losses
in the near term but earn mediocre have increased by an even greater magnitude over time. This implies that reinsurance
returns in the long run prices need to increase significantly for underwriters to earn adequate returns,
especially in a scenario where cat losses approximate those in the 2018-2020 period.
If cat losses revert to 2012-2016 levels, returns will be strong, but pricing might not

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

hold up given the commoditized nature of the reinsurance market, the industry’s
excess capacity, and the likely entrance of additional capital into the market.

Figure 7: Global Insured Losses vs. % Change in Global Property Cat Prices
$ amounts on left axis reflect cat losses in billions; numbers on right axis reflect the Guy Carpenter Cat pricing index R-O-L Source: Aon Benfield and Guy Carpenter. Note:
Base year 2000 = 100.

$160 600

$140
500
$120
400
$100

$80 300

$60
200
$40
100
$20

$0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Insured Losses Guy Carpenter Global Property Catastrophe Rate-on-Line Index

Source: Aon Benfield and Guy Carpenter. Note: Base year 2000 = 100.

We are especially negative on long-term rate adequacy and structural

headwinds facing the reinsurance business. Capital formation in reinsurance has
become increasingly easier over time, and the sources of capacity have become more
diverse to include insurance-linked securities, sidecars, etc. Besides traditional
re/insurers, alternative asset managers and investors have become more interested in
insurance as a source of investable float and uncorrelated returns. Additionally, we
believe the prospects of a hardening market in a low interest rate environment will
continue to attract additional alternative and traditional capital providers alike,
seeking to capitalize on this opportunity. The P&C sector raised approximately
$11.0 billion of capital between private and public markets in 2020.4 Although the
amount is small relative to the P&C sector's entire capital base, it illustrates the ease
and speed with which capital can enter the market.

4
McNestrie, Adam. “Start-ups, scale-ups, recaps raise $11bn”. The Insurance Insider. Dec. 11, 2020.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 8: P&C Industry Capital Bases Figure 9: P&C Industry Capital Raise Allocation
$ in billions
$900
$800
$800

$700

$600

$500 $471

$400

$300

$200

$100 $37
$11
$0
Newly raised equity Funds at Lloyd's Reinsurance capital U.S. P&C Surplus

Source: The Insurance Insider. Source: The Insurance Insider.

The tables below list some of the notable sources of additional industry capital
during 2020, which include incumbent carriers as well as private equity sponsors.

Table 3: 2020 Equity Market Fundraises for Incumbent Carriers Table 4: 2020 Private Equity Fundraises for Incumbent Carriers

Company Public Equity Raise $mn Company Public Equity Raise $mn
RenRe $988 Convex $1,000
QBE $814 Ark $800
Hiscox $466 Fidelis $800
Beazley $300 Total $2,600
Lancashire $356 Source: The Insurance Insider.

R&Q $100
Total $3,024
Source: The Insurance Insider.

Capital tied up in ILS structures has contributed to hardening prices as well, but a
considerable proportion of this should get freed up as more claims get adjudicated by
2021. While reinsurers could report robust returns over short periods, we expect their
margins and ROEs over a full market cycle to be mediocre. As shown in the figure
below, reinsurers have struggled to earn returns above their cost of capital over
longer periods, and we do not envision a major improvement in the future. As such,
we recommend commercial lines stocks over reinsurance names to investors seeking
to take advantage of the hardening pricing theme.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 10: Reinsurers’ ROEs vs. Cost of Capital

SUBSET includes Willis Re’s aggregation of the most visible global reinsurers

Source: Willis Re.

Industry Reserves Adequate, and PYD Tailwind to Moderate

In our view, P&C reserves are sufficient overall and our models project the
benefit to insurers’ earnings from favorable development to moderate in 2021.
Favorable reserve development has been a notable contributor to insurers’ earnings
during in the past several years. We expect most companies’ results to benefit from
favorable development in 2021 as well (ex. COVID-related claims), but to a lesser
extent than in the past few years. The industry reported favorable development of
$7.2 billion in 2019, $13.0 billion in 2018, and $12.3 billion in 2017. Most major
product lines have developed favorably in recent years, especially workers’ comp.,
personal auto, fidelity & surety, and mortgage guaranty. Conversely, commercial
auto liability, other liability, and product liability were among the few lines that have
exhibited unfavorable development. The industry’s reserve cushion has gotten
depleted with heavy losses in recent years, but it remains adequate (slightly in excess
of stated reserves currently). Based on our calculations, primary P&C industry
reserves are redundant by close to $9 billion (as of the beginning of 2020), with a
vast majority of that in commercial lines. In our opinion, the challenging tort
environment and emerging claims issues (opioids, molestation, etc.) present the
biggest risks to commercial insurers’ reserves. Business interruption losses stemming
from COVID-19 are a near-term risk as well.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 11: P&C Industry’s Reserve Surplus (Deficiency) as % of Stated Reserves

10.0%
9.0%

8.0%
7.1%

6.0%

4.4%
3.7% 3.8%
4.0% 3.4% 3.6%
3.4%

2.3%
2.0%

0.0%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Note: Based on U.S. statutory direct lines excluding reinsurance and two year lines and excludes the most recent accident year, which is less conducive to traditional chain ladder actuarial
approaches. This represents roughly 70% of U.S, statutory industry reserves. Source: SNL Financial.

Figure 12: P&C Industry Reserve Surplus (Deficiency) / Net Earned Premiums
$ in thousands

$35,000,000 12%

10.2%
$30,000,000
10%

8.4%
$25,000,000
8%

$20,000,000
5.1% 6%
$15,000,000 3.9% 3.6%
4.0% 3.5% 3.3%
4%
$10,000,000 2.1% 2.1%

2%
$5,000,000

$0 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Reserve Surplus (Deficiency) Current Surplus for all accident years / Latest Annual NEP

Note: Based on U.S. statutory direct lines excluding reinsurance and two year lines and excludes the most recent accident year, which is less conducive to traditional chain ladder actuarial
approaches. This represents roughly 70% of U.S, statutory industry reserves. Source: J.P. Morgan estimates, Schedule P data. Excludes reinsurance, crop and 2 yr lines.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Credit Environment a Concern, but Balance Sheets Strong

We view P&C balance sheets as robust and believe that insurers have ample
capital to withstand a potential uptick in credit defaults or downgrades. Barring
a severe recession in 2021 or an unusually negative outcome to pending business
interruption litigation, we do not envision material stress on P&C insurers’ balance
sheets. Among our coverage companies, we feel that AIG is the most exposed to an
increase in investment losses, followed by CB and PGR. We assess various insurers’
exposure to deteriorating credit conditions based on the following three metrics:

 Portfolio allocations and exposure to risky investments: In our opinion, AIG

has the highest exposure to risky securities, as evidenced by its above-average
exposure to below-investment grade bonds. ALL, CB, and PGR have relatively
high allocations to equities and alternatives as well. Meanwhile, other than TRV,
all major P&C underwriters we cover have high allocations to structured
securities, with PGR the most exposed.
 Asset leverage: Low asset leverage is the primary reason for P&C firms being
less susceptible to an uptick in credit losses or defaults than life insurers, even
though portfolios for the latter are generally more conservative. The average
investments / equity ratio for P&C firms we cover is close to 3x, less than half for
the life insurance sector. On this metric, AIG seems the most exposed, as its asset
leverage is almost twice the level for the rest of the sector, primarily due to its
significant exposure to the life and retirement markets.
 Balance sheet flexibility: Although capital levels do not affect the magnitude of
investment losses, they help differentiate insurers in terms of companies’ ability
to withstand losses. In our opinion, all underwriters we cover have healthy capital
flexibility, with the exception of AIG. Other than AIG, debt to capital levels for
all seem manageable and imply excess leverage capacity.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 5: Investment Portfolio Allocation Summary

Data as of 9/30/20
Commercial Average Personal Average
ACGL AIG CB HIG RNR TIG TRV ALL PGR
Total Securities
U.S. Government & Agency 17% 2% 3% 3% 22% 3% 3% 8% 3% 22% 13%
Other Governments 8% 4% 10% 2% 3% 0% 1% 4% 1% 0% 1%
State & Municipal 2% 4% 10% 17% 0% 7% 41% 12% 11% 10% 10%
Mortgage & As set-Backed Securities 11% 20% 18% 23% 14% 24% 3% 16% 1% 24% 12%
Public Utilities 0% 6% 0% 4% 0% 26% 0% 5% 7% 0% 4%
Corporate Debt 30% 39% 43% 31% 23% 15% 38% 31% 49% 24% 36%
Total Equity Instruments 6% 0% 3% 1% 3% 1% 0% 2% 5% 10% 8%
Other Investments 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Total Securities as % of Total Portfolio 74% 76% 87% 81% 65% 76% 87% 78% 77% 90% 84%

Other Inves tment Assets

Mortgage Loans 0% 12% 0% 8% 0% 0% 0% 3% 5% 0% 3%
Policy Loans 0% 1% 0% 0% 0% 0% 0% 0% 1% 0% 0%
Total Investment in Real Estate 0% 2% 0% 0% 0% 0% 1% 0% 1% 0% 1%
Short-term Investments 9% 6% 4% 6% 24% 2% 8% 8% 5% 10% 8%
Investment in Partners hips 7% 2% 7% 3% 0% 2% 3% 4% 8% 0% 4%
Other Investments 8% 0% 1% 0% 5% 0% 1% 2% 2% 0% 1%
Cas h and Cas h Equivalents 3% 1% 1% 0% 6% 20% 1% 5% 0% 0% 0%
Other Inves tment Assets as % of Total Portfolio 26% 24% 13% 19% 35% 24% 13% 22% 23% 10% 16%

Fixed Income Portfolio Rating

AAA/AA/A 80% 59% 67% 73% 78% 92% 85% 76% 76%
89% 93%
BBB 14% 30% 16% 23% 12% 7% 13% 17% 22%
Below-Investment-Grade/Not Rated 6% 11% 17% 4% 10% 1% 2% 7% 11% 2% 7%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Other Portfolio Metrics

Duration of Fixed-maturity Investments (years) 3.2 7.2 4.0 5.0 2.9 3.5 4.1 4.3 5.2 3.0 4.1

Portfolio Leverage (T. Fixed Income / T. Equity) 1.6 4.3 1.9 2.7 2.7 2.7 3.0 2.7 2.6 2.3 2.4
Portfolio Leverage (T. Inves tments / T. Equity) 2.2 5.6 2.1 3.3 3.0 2.7 3.4 3.2 3.6 2.5 3.1

Total Portfolio ($ billions) 25.7 356.4 116.0 54.8 20.3 0.4 83.6 91.2 45.8
Total Equity ($ billions ) 11.7 63.6 56.4 16.6 6.9 0.1 24.3 25.3 18.1
Source: SNL, Company reports, and J.P. Morgan estimates.

Figure 13: Industry Debt-to-Capital Summary

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1Q20 2Q20 3Q20 Average
Pers onal Lines
ALL 21% 31% 26% 24% 24% 23% 22% 19% 20% 24% 22% 23% 22% 22% 20% 20% 23%
PGR 31% 34% 27% 24% 30% 26% 23% 24% 26% 27% 25% 29% 25% 28% 25% 24% 27%

Commercial / Multi-Lines
AIG 67% 77% 60% 48% 40% 33% 29% 23% 24% 29% 33% 38% 35% 36% 38% 37% 40%
CB 13% 20% 16% 18% 17% 16% 17% 17% 25% 22% 20% 20% 23% 23% 23% 24% 20%
HIG 19% 40% 25% 25% 23% 25% 26% 25% 23% 23% 27% 26% 24% 22% 20% 20% 24%
TRV 19% 20% 19% 21% 21% 20% 20% 20% 21% 22% 22% 22% 20% 22% 22% 21% 21%

Reinsurance
ACGL 7% 10% 12% 14% 13% 7% 14% 11% 16% 21% 20% 17% 17% 17% 21% 19% 15%
RNR 10% 11% 6% 10% 8% 7% 5% 5% 14% 14% 15% 12% 14% 11% 10% 10% 10%

Brokers
AON 28% 27% 27% 35% 36% 35% 35% 46% 48% 53% 56% 60% 72% 74% 71% 71% 48%
MMC 33% 38% 38% 32% 33% 31% 27% 32% 40% 43% 42% 43% 64% 68% 65% 63% 43%
Source: Bloomberg Finance L.P. and J.P. Morgan.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Lower Yields to Pressure Investment Income in 2021

The interest rate environment facing P&C insurers has been challenging and,
contrary to popular belief, deteriorated further in 4Q20. Although Treasury
yields rose in the fourth quarter, credit spreads in securities that comprise a majority
of P&C insurers’ portfolios compressed by a greater magnitude. As a result, we
estimate that new money yields in insurers’ portfolios declined by 20-30 bps in 4Q.
This follows a significant drop in 3Q20 and 2Q20. Based on our estimates, interest
rates would have to increase over 150 bps to fully offset the drag on most insurers’
portfolio yields, which should continue to decline in the near term. Given our
expectation of a gradual economic recovery and continued actions by the Federal
Reserve to support the credit market, we believe that interest rates are more likely to
stay flat or drop than rise, which bodes poorly for investment income and earnings.

Table 6: New Money Yields Dropped in 4Q20

Refers to spreads on major asset classes in insurers’ investment portfolios versus Treasury Yields
Spread vs. U.S. Treasuries (bps) Estimated Yield (bps)
9/30/2019 12/31/2019 3/31/2020 6/30/2020 9/30/2020 12/30/2020 9/30/2019 12/31/2019 3/31/2020 6/30/2020 9/30/2020 12/30/2020

A Corporates (3-5 yr) 75.83 60.92 222.19 92.64 81.68 57.74 231.33 226.42 255.19 116.14 103.68 84.74
Quarterly change (0) (15) 161 (130) (11) (24) (18) (5) 29 (139) (12) (19)

BBB Corporates (3-5 yr) 122.54 101.21 382.86 180.02 152.21 98.93 278.04 266.71 415.86 203.52 174.21 125.93
Quarterly change (4) (21) 282 (203) (28) (53) (22) (11) 149 (212) (29) (48)

U.S. High Yield 475.32 424.19 949.38 722.37 602.69 445.57 630.32 593.19 986.38 751.37 630.69 482.57
Quarterly change 14 (51) 525 (227) (120) (157) (7) (37) 393 (235) (121) (148)

5 Year Agency CMO 80.00 75.00 150.00 95.00 80.00 80.00 235.00 244.00 187.00 124.00 108.00 117.00
Quarterly change 0 (5) 75 (55) (15) 0 (21) 9 (57) (63) (16) 9

Distressed Euro Credits 74.26 52.85 88.93 68.74 45.39 18.32

Quarterly change 18 (21) 36 (20) (23) (27)
Source: DataQuery and J.P. Morgan estimates.

In the near term, the impact of lower yields on fixed income securities should be
offset by robust alternative investment income. Most insurers report private equity
returns on a 1-quarter lag and hedge fund returns on a 1-month lag or a concurrent
basis. However, allocations to private equity are higher than those to hedge funds. As
such, the lag effect of the strong equity market in 3Q20 and 4Q20 should drive
robust returns on alternative investments in 4Q20 and 1Q21, masking the impact of
lower yields in the next few quarters.

While lower interest rates pose a headwind for investment income, they should
lift book value growth. Still, we view part of the impact to book values as optical
and not economic, as insurers mark their assets to market but not their liabilities,
especially for long duration products.

Table 7: Book Value Sensitivity to Changes in Interest Rates

% impact of a 100 basis points change in interest rates to 2019 book values
ALL ACGL CB RNR PGR TRV HIG

100 bps change in interest rates 4.0% 5.9% 6.0% 6.6% 6.6% 6.7% 11.4%
Source: Company reports and J.P. Morgan estimates. NM implies not meaningful.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Key Topics of Focus in 2021

We expect re/insurance pricing, auto frequency, COVID-19 losses, and organic
growth for brokers to be the key areas of investor focus in the near term. In our
opinion, 4Q20 results for most insurers will improve markedly from 3Q20 levels,
which were pressured by elevated catastrophe losses. Still, investors are more likely
to focus on commentary for 2021 than on reported results with the upcoming
earnings season. In both commercial lines and reinsurance, we expect the market to
be keenly focused on pricing trends, including data points from Jan. 1 renewals.
Furthermore, results for re/insurers could be affected by potential COVID-19 claims,
but these should be modest in the near term. Meanwhile, the interplay between
pricing and loss cost trends in the auto line should be a key driver of results for
personal lines carriers. For brokers, we expect organic growth to gradually recover in
4Q20 and through this year, and results should be especially strong in mid-2021
given easier comps. In our opinion, the following will be the major drivers of the
P&C sector’s performance in 2021:

Commercial Re/Insurance Pricing to Continue to Harden

We expect management teams to remain bullish on overall industry pricing
trends in the near term. Recent pricing data from industry surveys suggests that
pricing trends in 4Q should be on par with those in 3Q20. WLTW’s Commercial
Lines Insurance Pricing Survey (CLIPS) reported that 3Q pricing increased by +9%
y/y (vs. +10% in 2Q) while the Council of Insurance Agents & Brokers’ third quarter
survey reported overall pricing increases of +12% y/y (vs +11% in 2Q). Most
management teams have expressed confidence in the sustainability of recent price
hardening in the commercial lines and reinsurance markets, with the notable
exception of workers’ comp. We expect specialty lines to demonstrate the most
pricing accelerations, followed by traditional primary lines and reinsurance. This, in
turn, bodes well for underwriting margins in 4Q20 and in 2021, and should help
mitigate the impact of lower interest rates on earnings. On a cautious note, the
industry remains flush with capital and we are concerned that a slowdown in
economic activity could stall pricing momentum if it drives a noticeable decline in
insured exposures (this would reduce demand while supply would be unchanged).

22
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 14: U.S. Commercial Property Price Changes

Refers to y-o-y % change
14%

12%

10%

8%

6%

4%

2%

0%

-2%

-4%
1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

3Q17

1Q18

3Q18

1Q19

3Q19

1Q20

3Q20
Source: CIAB.

COVID-19 Losses to be Manageable, but Present Tail Risk

In our view, COVID claims will be manageable overall, but ultimate payouts
will depend on the courts and the uncertainty presents an overhang for stocks.
Select primary insurers in addition to reinsurance carriers could potentially have
considerable COVID exposure. In our opinion, COVID-driven claims for
underwriters will be manageable overall and decline relative to 1H20 levels. We
expect P&C underwriters to incur claims in the business interruption, workers’
compensation, event cancellation, general liability, and D&O lines. Among these,
business interruption losses are the most debatable and uncertain. To the extent
primary underwriters incur claims, reinsurers will be exposed as well.

Our models assume relatively modest business interruption and other COVID-
related claims in 4Q20. We expect companies in our P&C coverage group to report
declining losses from COVID-19 related claims. Although product lines such as
event cancellation and abandonment, media and entertainment, and travel will
continue to have COVID-related claims exposure, the magnitude of losses is
expected to dissipate. The threat of industry destabilizing business insurance claims
that initially unnerved investors at the onset of the global pandemic also appears to
have subsided, although it has not abated fully. We expect management teams to
express optimism with regards to their ultimate exposure to COVID-related business
interruption claims, reflecting confidence in their policies’ virus exclusions. In
addition, we believe that courts will continue to side with underwriters in pending
business interruption cases in most cases.

23
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 15: Potential Distribution of COVID-19 Losses

Source: Lloyd's and J.P. Morgan.

Among product lines most exposed to COVID-19 claims, business interruption

poses the most tail risk. We expect most business interruption claims to be deemed
uninsured, but insurers’ ultimate payouts will depend on the courts. Theoretically,
business interruption claims could exceed $100 billion, but most policies do not
cover BI related to a virus or absent property damage. As a result, the vast majority
of BI losses attributed to COVID-19 are likely to be uninsured. Still, ultimate claims
facing insurers will depend on the outcome of pending litigation. Since many
businesses domestically and abroad were forced to close in order to comply with
government mandates, a liberal interpretation of physical damage could result in
claims litigation despite the fact that most policies do not cover business interruption
attributed to viruses. The American Property Casualty Insurance Association has
already estimated that monthly BI losses for small business could range between
$220 billion and $383 billion if the industry was forced to provide coverage for these
COVID-19 related BI claims.5 BI has historically been a commercial property/multi-
peril insurance coverage triggered as a result of physical property damage. Following
are the top 10 underwriters of U.S. commercial multi-peril insurance by market
share:

5
“Opinion: The birth of the standalone pandemic market?". Shi, Catrin. The Insurance Insider. Mar. 31,
2020.

24
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 16: Commercial Multi-Peril Market Share (2009-2019)

2019
Rank Company 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

1 Travelers 9.1% 9.4% 9.5% 9.0% 8.5% 8.3% 8.2% 8.2% 8.1% 8.3% 8.5%
2 Liberty Mutual 6.6% 6.7% 6.7% 6.4% 6.1% 5.8% 5.8% 5.8% 5.8% 5.7% 5.6%
3 Nationwide 5.6% 5.6% 5.7% 5.8% 6.1% 6.5% 6.6% 6.5% 6.3% 5.7% 5.5%
4 Chubb 6.1% 5.9% 5.9% 5.6% 5.4% 5.7% 5.4% 5.1% 4.8% 5.0% 5.1%
5 The Hartford 5.5% 5.4% 5.2% 4.8% 4.6% 4.5% 4.5% 4.6% 4.7% 4.8% 4.8%
6 Tokio Marine 3.6% 3.8% 3.8% 4.0% 4.1% 4.3% 4.4% 4.6% 4.6% 4.8% 4.7%
7 State Farm 4.7% 4.6% 4.3% 4.0% 4.0% 3.9% 3.9% 3.9% 3.8% 3.8% 3.8%
8 Farmers Insurance 4.0% 4.0% 3.9% 3.8% 3.8% 4.2% 4.1% 4.1% 4.0% 3.8% 3.5%
9 Cincinnati Ins. Cos. 2.6% 2.7% 2.7% 2.8% 2.9% 2.9% 2.9% 3.0% 3.0% 2.9% 2.9%
10 Auto-Owners Ins. 2.3% 2.4% 2.4% 2.5% 2.6% 2.7% 2.6% 2.6% 2.7% 2.8% 2.8%

Top 3 21.3% 21.6% 21.9% 21.2% 20.7% 20.5% 20.6% 20.5% 20.2% 19.7% 19.5%

Cos. ranked 4-10 28.7% 28.7% 28.3% 27.5% 27.4% 28.3% 28.0% 27.8% 27.6% 27.8% 27.5%
Top 10 50.0% 50.4% 50.2% 48.7% 48.1% 48.8% 48.6% 48.3% 47.8% 47.4% 47.0%
Source: SNL Financial.

Although there are valid claims where policyholders bought contingent coverage,
many insureds who do not qualify for benefits have filed lawsuits for damages.
Hence, insurers’ eventual payouts will depend on litigation activity and companies
are likely to incur significant legal costs. There are over 1,000 pending COVID-
related business interruption cases in the United States and court judgments are
slowly beginning to materialize. Recent decisions in U.S. courts have
overwhelmingly favored carriers, with the last count of their record standing at 9-1.
The sole loss stems from a Missouri decision that applied a liberal interpretation of
“loss”, based on the view that “loss” could also mean “loss of use”. Overall, the
plaintiff’s bar has been largely unsuccessful in persuading domestic courts that
COVID-19 is physically present on property and therefore poses an imminent threat
to the public. However, carriers’ motions for dismissal or summary judgment have
been denied in six out of nine cases that pleaded a physical presence and lacked an
exclusion. Nonetheless, courts have exhibited willingness to allow policyholders to
present arguments against underwriters.

Progress outside the U.S. has been scant as well, although less favorable for
insurers. In September 2020, the British Financial Conduct Authority (FCA)
concluded its test case regarding how business interruption policies should be
interpreted and whether underwriters should be obliged to pay potential claims that
are estimated to be in the £9-18 billion range ($11.6bn to $23.1bn).6 Eight insurers
were involved in the test case, including Arch, Argenta, Ecclesiastical, Hiscox, MS
Amlin, QBE, RSA and Zurich.7 Carriers argued that the loss triggering event must
occur at a specific time and in a particular place, a standard that the pandemic fails to
meet. However, the court ultimately decided that the majority of disease clauses
provided cover for losses triggered by COVID-19. The FCA also concluded that

6
“High Court largely backs insureds in UK BI test case: FCA". The Insurance Insider. Sep. 15, 2020.
7
“FCA BI test case expected to pivot on causation and vicinity wordings”. Casey, Samuel. The Insurance
Insider. Jun. 17, 2020.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

COVID-19 and the subsequent government and public response qualified as a single
cause for a covered loss. Regardless of any subsequent appeals, the FCA decision is a
victory for policyholders over insurers.

In the immediate aftermath of the FCA’s decision, Hiscox announced that it

anticipates an additional £100 million ($128.5 million) of claims stemming from
U.K. business interruption losses on top of its previously issued range of £10-25
million net of reinsurance. Similarly, QBE estimated that it would incur $70 million
of net losses, with an additional $100 million being covered by reinsurers.8
Meanwhile, RSA noted that it would expect an additional £104 million of losses, but
that the majority of this amount would be covered by its reinsurance program. On the
other hand, companies such as Travelers and Zurich indicated that the FCA test case
would have no material impact on their expectations of COVID-19 losses.

In terms of claims other than business interruption, exposure and losses vary
significantly by carrier. AIG has experienced elevated claims as well as a
significant loss of revenue on its travel insurance business. Underwriter Beazley
forecasts that it will incur approximately $340 million in event cancellation costs,
while Hiscox estimates that losses stemming from event cancellation and
abandonment, media and entertainment, and travel will approximate $150 million.9
Although we believe that a slowdown in the overall economy will pressure premium
growth in 2021, we feel that P&C firms are more susceptible to the broader impact of
the pandemic on the credit environment, equity market, and interest rates than direct
claims from the virus. Business interruption claims present significant tail risk, but
uncertainty about losses facing commercial lines insurers is a key concern among
investors. While investors seem less concerned about reinsurers in this regard, they
are exposed to tail risk in an adverse scenario as well.

Table 8: 2020 Quarterly Disclosed COVID-19 Losses

$ in millions

Company 1Q20 2Q20 3Q20 Total

ACGL $86.6 $173.1 $11.9 $271.6

AIG $272.0 $458.0 $185.0 $915.0
CB $13.0 $1,157.0 $0.0 $1,170.0
HIG $50.0 $251.0 $72.0 $373.0
RNR $103.8 $0.0 $0.0 $103.8
TRV $86.0 N/A N/A $86.0

Total $611.4 $2,039.1 $268.9 $2,919.4

Source: Company reports.

8
“QBE pegs net UK BI losses at $70mn as it weighs appeal of court judgment”. Casey, Samuel. The
Insurance Insider. Sep. 16, 2020.
9
“Beazley: A canary in the contingency coal mine?” Board, Laura. The Insurance Insider. Sep. 23, 2020.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Auto Frequency & Pricing Drivers of Personal Lines Results

We expect personal lines insurers to report strong earnings in 4Q20, reflecting
the benefit of reduced personal auto frequency trends and lower cat losses.
Furthermore, unlike their commercial lines peers, personal underwriters have
demonstrated negligible exposure stemming from COVID-19 claims. Although
declining prices in the personal auto line present a major negative, the impact of this
in the near term should be masked by favorable loss trends. We expect personal lines
carriers to report losses attributed to Hurricanes Delta, Zeta and Eta with 4Q20
results, but their overall cat losses should decline meaningfully from 3Q20 levels.
Thus far, ALL has pre-announced $345 million of October catastrophe, reflecting
exposure to Hurricanes Delta and Zelta. However, ALL did not pre-announce
November catastrophe losses, which indicates that November losses did not exceed
the company's $150 million reporting threshold. Through November, PGR has
reported roughly $108 million of catastrophe losses in 4Q20.

We project that personal lines results will continue to benefit from favorable
auto frequency in the near term, but expect margins to decline as 2021
progresses. Widespread work-from-home policies and ongoing social distancing led
to a significant drop in miles driven for both work and leisure in 2020. This, in turn,
drove robust margins across both personal and commercial auto lines, and we expect
the trend to continue in the short term. Commercial auto results benefited from this
dynamic as well, but to a lesser extent than personal auto. However, the benefit
should moderate through 2021 as miles driven continue to recover. While not
assumed in our models, we are concerned that personal auto margins could weaken
considerably if competition in the market remains intense and prices continue to
decline while frequency picks up.

In our view, miles driven will continue to recover in 2021, but we expect them to
remain below pre-COVID levels for the foreseeable future. Even following the
withdrawal of mandated closures and work-from-home policies, we expect more
individuals to work remotely more often than previously, having learned to better
perform their key tasks outside the office in the past several months. As such, miles
driven for work is likely to stay lower than pre-COVID levels for at least a year or
even longer. Meanwhile, miles driven for leisure could increase to above pre-COVID
levels as a fear of air travel (which could last a while) and low fuel prices entice
vacationers to drive for pleasure instead of flying overseas or to other far off
locations. Overall, this should somewhat mitigate the impact of lower miles driven
for work, but we expect total miles driven to stay lower than in the past.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 17: Y/Y Change in U.S. Miles Driven

Data through October 2020
5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

-35%

-40%

-45%
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Jan-18
Mar-18
May-18
Jul-18
Sep-18
Nov-18
Jan-19
Mar-19
May-19
Jul-19
Sep-19
Nov-19
Jan-20
Mar-20
May-20
Jul-20
Sep-20
Source: U.S. Department of Transportation Federal Highway Administration.

On a cautious note, prices seem to be catching up to reflect low loss frequency,

and an over-correction could pressure personal lines margins in 2H21. Several
competitors, including Allstate, GEICO, Progressive, and State Farm, are proactively
trying to gain or protect market share. Although the impact of lower prices should be
more than offset by favorable frequency in the near term, we expect margins in
insurers’ personal auto businesses to decline as the year progresses. In addition,
similar to commercial lines, top-line growth in the personal auto business is
susceptible to an economic slowdown. While not assumed currently, a prolonged
shift in workplace behavior and fewer individuals commuting to offices has a major
long-term negative implication for the personal auto business, as it would likely
reduce the number of cars owned by families. Conversely, less reliance on public
transportation and car sharing are potential positives. Overall, we expect results in
insurers’ personal auto businesses to be strong in 4Q20, but margins should decline
as 2021 progresses and could weaken considerably if competition remains high.

Brokers to Report Improving Organic Growth and Margins

Our models project brokers to report modest, but improving, organic growth
and gradual margin expansion in the next few quarters. We forecast sluggish
organic growth and strong margins in 4Q20, and expect an uptick in growth and
expansion in margins through 2021. Besides a recovery in commercial lines
premiums, brokers’ results should benefit from hardening re/insurance prices,
although to a lesser extent than those for the underwriters. More importantly, we
expect brokers to leverage various expense reduction programs as well as
incremental cost savings from recent M&A to drive margin improvement despite a
slowdown in the economy. A deep recession would pressure revenues for brokers as
well, but we expect their results to withstand a downturn considerably better than
most underwriters’, partly due to greater control over expenses and margins.

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 Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 18: Broker Organic Growth (2008 - YTD 2020) Figure 19: Broker Adjusted Operating Margins (2008 - YTD 2020)
10% 40%

8% 35%

6%
30%

4%
25%
2%
20%
0%

15%
-2%

10%
-4%

-6% 5%

-8% 0%
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

1Q20

2Q20

3Q20

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

1Q20

2Q20

3Q20
MMC AON WLTW BRO AJG MMC AON WLTW BRO AJG

Source: Company reports. Source: Company reports.

Valuations Reasonable, but Not Too Enticing

Valuation levels for the P&C sector seem attractive, but are not overly
compelling following the group’s recovery in 4Q20. As has been the case recently,
brokers continue to trade at elevated valuation levels versus historically, while
multiples for underwriters are more reasonable. The J.P. Morgan P&C universe,
which comprises a diverse set of personal lines, commercial lines, and reinsurance
carriers, is currently trading at 1.15x book value and 13.5x forward EPS, close to
historical levels of 1.14x and 12.1x, respectively. In addition, the sector is trading
close to the middle of its historical trading range on both BV (0.8-1.5x) and forward
earnings (6.2-17.7x). Although multiples seem reasonable, they are no longer so
depressed for us to get bullish on the sector solely on the basis of valuation levels.
Meanwhile, large P&C brokers are trading at a P/E multiple of 23x, above their
historical level of 17x.

We derive our price targets for underwriters using a weighted average of:

 Price to total book value (50% weight)

 Price to book value ex. AOCI (20% weight)
 P/E (30% weight)

A majority of analysts and investors likely use primarily total book in their valuation
analysis, but we feel that P/E should be incorporated as well, especially as it enables
a better assessment of a company’s earnings power and future book value growth
potential. Also, P/E is not subjected to oddities in book value such as intangibles and
over/understatement of reserves. In terms of book value, we use primarily total BV,
but assign a modest weight to BV ex. AOCI as well, partly as many P&C carriers
have life insurance businesses (AIG, ALL, and CB, etc.), where the assets are
marked to market but not liabilities (using BV ex. AOCI excludes asset gains/losses).
We base our target BV multiples on a company’s long-term ROE potential as well as
our assessment of the strength of a firm’s franchise. For P/E, our target multiples are

29
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

based primarily on long-term EPS growth potential as well as the quality of a

company’s earnings (i.e. the prevalence or lack of below-the-line non-GAAP
adjustments to net EPS when deriving operating EPS).

Figure 20: P&C Insurance Average P/BV Figure 21: P&C Insurance Average P/Fwd PE
Based on book values as of 9/30/20 Based on one year forward calendar year earnings, as of 9/30/20
1.60x 19.0x

1.50x
17.0x

1.40x
15.0x
1.30x

1.20x 13.0x

1.10x 11.0x

1.00x High = 17.7x

High = 1.55x 9.0x Low = 6.2x
Low = 0.79x Median = 12.6x
0.90x
Median = 1.15x Average = 12.1x
Average = 1.14x 7.0x Current = 13.5x
0.80x Current = 1.15x

0.70x 5.0x
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bloomberg Finance L.P. and J.P. Morgan. Source: Bloomberg Finance L.P. and J.P. Morgan.

For brokers, we derive our price targets off “adjusted” EPS and expected organic
growth. However, given brokers’ pervasive use of non-GAAP adjustments, we
modify the assigned multiples for various firms based on the aggressiveness of how
the adjusted EPS metric is computed (i.e. use of non-GAAP adjustments) as well as
how it relates to cash flows.

Figure 22: P&C Insurance Brokers Average P/Fwd PE

25.0x

23.0x

21.0x

19.0x

17.0x

15.0x High = 23.1x

Low = 12.4x
Median = 16.3x
13.0x Average = 16.5x
Current = 23.1x

11.0x
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bloomberg Finance L.P. and J.P. Morgan.

30
Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Allstate
Not Rated
The Allstate Corporation (ALL;ALL US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 307 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 125.92-64.13 NEP (Premium) ($ mn) 32,950 34,843 35,869 35,722 36,748 36,592 - 37,358
Market cap ($ mn) 33,748.51 Operating income ($ mn) 3,359 4,640 4,497 4,619 4,432 4,834 - 4,670
Exchange rate 1.00 Adj. net income ($ mn) 3,129 3,477 3,900 3,991 3,463 3,793 - 3,658
Free float(%) 97.5% Combined ratio 93.2% 92.0% 88.9% 88.6% 90.7% 91.4% - 92.3%
3M - Avg daily vol (mn) 1.91 Adj. EPS ($) 8.86 10.43 12.37 12.66 11.74 12.75 - 12.85
3M - Avg daily val ($ 187.0 BBG EPS ($) 7.92 10.48 - 12.50 - 12.56 - 12.81
mn) Reported EPS ($) 5.70 14.03 12.30 12.58 11.17 12.18 - 12.27
Volatility (90 Day) 21 DPS ($) 1.84 2.00 2.16 2.16 2.32 2.24 - 3.29
Index S&P 500 Dividend yield 1.7% 1.8% 2.0% 2.0% 2.1% 2.0% - 3.0%
BBG BUY|HOLD|SELL 10|8|1 Adj. P/E 12.4 10.5 8.9 8.7 9.4 8.6 - 8.6
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

We have suspended our rating and price target for Allstate (ALL) due to
J.P. Morgan's involvement in the company’s proposed acquisition of NGHC,
announced on July 7, 2020.

Fourth Quarter 2020 & 2021 Outlook

Raising EPS Estimates We are increasing our 4Q20 EPS estimate from $3.44 to $3.73 and our 2021
4Q20E: from $3.44 to $3.73 forecast from $11.74 to $12.75. The key driver of the higher 4Q20 estimates is a
reduction in our 4Q catastrophe loss estimates, while the increased 2021 estimate is
2021E: from $11.74 to $12.75
primarily driven by our outlook for continued low auto loss frequency trends in the
2022E: from $12.00 to $12.85 near term. However, we expect frequency to pick up as 2021 progresses. Our revised
model also assumes elevated alternative investment income in 4Q20 and in 2021,
driven primarily by the lag effect of the strong equity market on returns for
alternative investments. We project premium growth to be modest in 4Q20, but pick
up slightly from the 3Q20 level. Additionally, despite macroeconomic headwinds,
we foresee ongoing robust growth in the services business due to the division’s focus
on discretionary consumer purchases.

Following are our forecasts for the key metrics that should drive Allstate’s
performance in 2021. Besides reported results, we expect investors to be interested in
additional commentary on management’s progress towards improving its expense
ratio and its outlook for frequency trends.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 9: 4Q20 & 2021 Estimated J.P. Morgan Model Forecasts

2Q20 3Q20 4Q20E 2020E 2021E

Adjusted Earnings by Division:

Property-liability 875 938 1,166 4,224 3,678
Services 38 40 40 155 221
Life 72 (14) 73 211 271
Benefits 5 33 17 79 103
Annuities (111) 37 (8) (221) (82)
Corporate & other (99) (111) (139) (456) (398)
Adjusted income (loss) 780 923 1,148 3,991 3,793

Weighted avg. dilutive shares 317.0 314.1 307.7 315.3 297.5

Operating EPS $2.46 $2.94 $3.73 $12.66 $12.75

Source: J.P. Morgan estimates.

Table 10: 4Q20 & 2021 Estimated Property-Liability Assumptions

2Q20 3Q20 4Q20E 2020E 2021E

P&L net written premiums 9,172 9,395 8,944 36,103 36,902
% change (y-o-y) 1.4% 0.9% 2.4% 1.9% 2.2%

Loss ratio ex cats and PYD 44.7% 54.8% 55.3% 52.9% 56.9%
Catastrophe losses 13.4% 11.1% 7.4% 8.6% 8.8%
PYD (favorable) / unfavorable -0.4% 0.8% -0.3% 0.1% 0.2%
Loss ratio 57.7% 66.7% 62.4% 61.6% 65.8%

Expense ratio 31.8% 24.9% 25.6% 27.0% 25.6%

Combined ratio 89.8% 91.6% 88.0% 88.6% 91.4%

Combined ratio ex cats & PYD 76.8% 79.7% 80.9% 79.9% 82.5%

Consolidated NII 409 832 786 2,448 3,020

% change (y-o-y) -56.6% -5.5% 14.1% -22.5% 23.4%

Operating ROE 13.2% 14.5% 17.8% 16.0% 14.4%

Shares repurchased 4.0 8.5 5.0 22.2 17.7

Source: J.P. Morgan estimates.

Property-Liability Operating Performance

 We forecast net written premiums growth of +2.4% y/y, reflecting stable
retention rates offset by declines in auto insurance pricing and mostly flat
homeowners’ pricing.
 Our model assumes ALL’s 4Q20 reported P&C combined ratio will improve
slightly from 88.7% in 4Q19 to 88.0% in 4Q20, reflecting the benefit of virus-
related shutdowns on personal auto frequency trends. Similarly, we estimate that
the underlying combined ratio will improve from 85.5% in 4Q19 to 80.9% in
4Q20. Within the underlying combined ratio, we estimate 7.4 CR pts of
catastrophe losses and 0.3 CR pts of favorable prior year reserve development.
For 2021, we are assuming a P&C combined ratio of 91.4% (82.5% ex. cats and
PYD), up from 88.6% (79.9% ex. cats and PYD) in 2020.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Allstate Life/Benefits/Annuities Operating Performance

 We forecast ALL’s 4Q total adjusted net income from the life, benefits, and
annuity divisions to be $81 million, up significantly from $59 million in 4Q19.
Results should benefit from robust alternative investment income in the annuity
segment. The life, benefits and annuities segments are projected to earn $292
million in 2021, considerably higher than $68 million in 2020, which was
suppressed by a large loss in the annuity segment.
Net Investment Income
 Our estimates assume total net investment income of $786 million in 4Q20, up
+14.1% from $689 million in 4Q19, helped by robust returns on alternative
investments (primarily limited partnerships). In 2021, we are assuming
investment income of $3.0 billion, up from $2.5 billion in 2020 (investment
income was very poor in the first half of last year).
Capital Management
 Our model assumes share repurchases of $500 million in 4Q20 and $2.0 billion in
2021 compared with $740 million in 4Q19 and $2.2 billion in 2020.
Management Commentary
 Allstate has ceased its practice of issuing guidance on the P&C combined ratio,
and instead plans to focus on the overall ROE, viewed as a broader long-term
measure as the company’s non-P&C businesses continue to expand. Management
has stated that its goal for long-term adjusted ROE in the 14-17% range. Besides
guidance, we expect investors to focus on commentary regarding the
transformational growth plan, trends in personal auto miles driven, personal auto
competition, potential share repurchases, and the likelihood of balance sheet
charges in the annuity book.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

American International Group

Neutral
American International Group (AIG;AIG US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 861 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 56.42-16.07 Operating income ($ mn) 1,409 5,478 3,148 3,098 5,042 5,267 5,251 5,462
Market cap ($ mn) 32,612.60 Adj. PBT ($ mn) 257 5,287 (5,727) (5,779) 4,083 4,301 4,541 4,746
Exchange rate 1.00 Adj. net income ($ mn) 1,064 4,084 2,344 2,304 3,878 4,051 4,036 4,200
Free float(%) 99.9% Combined ratio 35.7% 34.4% 33.5% 33.5% 33.3% 33.3% 33.2% 33.3%
3M - Avg daily vol (mn) 5.77 Adj. EPS ($) 1.17 4.59 2.67 2.64 4.61 4.63 5.05 4.95
3M - Avg daily val ($ 200.1 BBG EPS ($) 2.24 4.58 - 2.48 - 4.36 - 5.00
mn) Reported EPS ($) (0.01) 3.74 (5.86) (5.93) 3.72 3.76 4.36 4.29
Volatility (90 Day) 39 DPS ($) 1.28 1.28 1.28 1.28 1.36 1.36 1.44 1.44
Index S&P 500 Dividend yield 3.4% 3.4% 3.4% 3.4% 3.6% 3.6% 3.8% 3.8%
BBG BUY|HOLD|SELL 9|10|0 Adj. P/E 32.4 8.2 14.2 14.4 8.2 8.2 7.5 7.6
Source: Company data, Bloomberg Finance L.P., J.P Morgan estimates

Valuation Compelling, but Fundamental Outlook Downbeat

AIG’s valuation is attractive, but we remain Neutral given its lackluster
business trends, above-average portfolio risk, and limited capital flexibility. In
our view, potential ROE expansion, firmer P&C prices, and a gradual improvement
in P&C margins are major positives. Also, AIG’s DTA is a valuable asset that should
allow capital to build at a faster pace than implied by after-tax earnings. On the other
hand, we expect life & retirement division results to be marked by weak margins,
spread compression, and net outflows. In the P&C business, margins should improve,
but are likely to remain modest overall, and we project growth to remain under
pressure due to lower volumes in the U.S. personal lines business (travel insurance).
Meanwhile, we expect the company’s elevated leverage ratio to limit capital
flexibility and project its AIG 200 restructuring program to weigh on cash flow, net
income, and book value growth. Valuation is attractive, but less so than it appears at
first glance after reflecting below-the-line items (which inflate operating EPS) and
accounting for the DTA (which is carried on the balance sheet at an undiscounted
value of $9 per share, but we estimate is worth $5 per share in terms of present value
of future tax savings). Regardless, investor sentiment is less upbeat than a year ago,
and AIG was one of the worst performing stocks in the insurance sector last year. As
such, we feel that the risk-reward in the stock is attractive.

2021 Outlook
Adjusting EPS Estimates We are lowering our 4Q20 EPS estimate from $1.09 to $1.06 and increasing our
2021 forecast from $4.61 to $4.63. Meanwhile, we are reducing our 2022 earnings
4Q20E: from $1.09 to $1.06
projection from $5.05 to $4.95. Our model reflects the positive impact of the equity
2021E: from $4.61 to $4.63 market (+$0.01 in 4Q20 and +$0.06 in 2021) and healthy variable investment income
2022E: from $5.05 to $4.95 (+$0.03 in each of 4Q20 and 1Q21), offset by a higher cat loss assumption (-$0.05 in
4Q20), COVID-19 mortality claims (-$0.02 in 4Q20 and -$0.01 in 1Q21), and less
accretion from share buybacks due to a lower dollar amount and a higher assumed
stock price (-$0.08 in 2021 and -$0.15 in 2022). In our opinion, AIG’s 2021 P&C
results will be marked by modest premium growth (due in part to weakness in the
U.S. personal lines business) and year-on-year improvement in the combined ratio. In
the life and retirement business, we expect ongoing spread compression, outflows,
and COVID-19 claims, especially in the 1H21. On a positive note, alternative

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

investment income is likely to be healthy in 4Q20 and 1Q21, helped by the lag effect
of the strong equity market. Besides reported results, we expect investors to focus on
management commentary regarding the P&C market (pricing, reserve development,
and potential BI claims), capital (particularly the resumption of buybacks), and the
AIG 200 program. We consider the following the major metrics on which to evaluate
the company’s operating performance:

 P&C margins and reserve development: We project P&C combined ratios of

93.0% in 4Q20 and 93.4% in 2021 (ex. cats and prior year development)
compared to 95.8% in 4Q19 and 94.3% in 2020. Including cats and PYD, we are
assuming combined ratios of 99.1% in 4Q20 and 98.1% in 2021 versus 99.8% in
4Q19 and 103.4% in 2020. Besides reported margins, we expect investors to
focus on management commentary regarding COVID-related losses and potential
exposure to business insurance claims. AIG’s P&C margins should improve over
time, helped by a better pricing environment and a more rational approach to
underwriting (lower net retentions) and reinsurance (coverage of additional risks
and geographies). Furthermore, the 2018 acquisition of Validus bodes well for
margins longer term as the acquired business had a lower combined ratio than
stand-alone AIG. Still, given AIG’s history and the challenging tort environment,
we remain concerned about additional adverse reserve development over time.
 Life & retirement spreads and flows: In our view, life & retirement results will
be marked by spread compression, negative flows, and sluggish revenue growth.
Although AIG has leading market positions in several life & retirement business
lines, its historical competitive advantages such as superior ratings and
dominance of select channels (e.g., banks) have eroded since the financial crisis.
Management has cut crediting rates to offset pressure on spreads, but it will have
less flexibility for further reductions as a greater share of its liabilities approaches
minimum guarantees and competition in channels such as banks picks up.
 Alternative investment income: We forecast healthy variable investment
income in both 4Q20 and early 2021, helped by the lag effect of the strong equity
market. Our model assumes alternative investment income of +$262 million in
4Q20 and +$841 million in 2021 versus +$255 million in 4Q19 and
+$607 million in 2020. AIG reports private equity income on a one-quarter lag
and hedge fund returns on a concurrent basis, but allocations to PE are
significantly higher than hedge funds.
 Results in non-core business: Following the sale of Fortitude Re (leaving AIG
with a 3.5% stake) to Carlyle in June 2020, AIG has exited substantially all of its
legacy life and P&C insurance businesses. Similarly, its exposure to legacy
investments (global capital markets and direct investment book) has declined
materially, from $6 billion at 12/31/2016 to about $1 billion. Earnings from the
legacy investment portfolio should decline over time as assets mature or are sold
off, but results will fluctuate as positions are marked to market. For 4Q20 and
2021, we project earnings legacy earnings of $25 million and $68 million.
 Updates on capital and share buybacks: Our model assumes no share
repurchases in 4Q20 and $400 million in 2021 (none in 1Q21 to 3Q21,
$400 million in 4Q21). AIG executed a $500 million accelerated repurchase plan
in 1Q20 but stopped buybacks shortly thereafter to preserve capital and reduce
debt (target leverage of 25%). At 9/30/20, AIG’s leverage ratio was 29.1%.
Management has indicated that it is willing to keep the leverage ratio above 25%
in the near term. Nevertheless, we believe that AIG’s elevated leverage could
delay a resumption of share buybacks to beyond 2021.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Investment Thesis, Valuation and Risks

American International Group (Neutral; Price Target: $39.00)
Investment Thesis
AIG’s valuation is compelling, but our Neutral rating reflects concerns about its
weak operating trends, above-average investment portfolio risk, and limited capital
flexibility. Potential ROE expansion and gradual improvement in P&C margins are
notable positives. Also, AIG’s DTA is a valuable asset that should allow capital to
build at a faster pace than implied by after-tax earnings. On the other hand, we
expect life & retirement results to be marked by lackluster margins, spread
compression, and outflows. Furthermore, AIG’s elevated leverage ratio is likely to
limit capital flexibility, while its AIG 200 restructuring program should suppress
cash flow, net income, and book value growth. Although the stock is cheap, it is not
as compelling as it appears at first glance given AIG’s significant below-the-line
items (which inflate operating EPS) and accounting for the DTA (which is carried on
the balance sheet at an undiscounted value of $9 per share, but we estimate is worth
$5 per share in terms of present value of future tax savings). Still, investor sentiment
has gotten more cautious and AIG significantly underperformed most peers in 2020.
Hence, the risk-reward in the stock seems positively skewed.

Valuation
We are maintaining our December 2021 price target of $39. In our view, the most
appropriate method to value AIG is to analyze the operating businesses separately
from the DTA (which we estimate to be worth $5 per share post tax reform). Based
on AIG’s current stock price, our estimated fair value for the DTA suggests that the
rest of the company is being valued at approximately $32 per share (7x 2021E EPS
and 0.6x BV ex. AOCI and the DTA). While this is much lower than median
multiples for the life and P&C sectors, we feel that a discount is justified given
AIG’s sub-par ROE. Our $39 price target is derived using multiples of 0.6x projected
12/31/21 BV ex. AOCI and DTA (50% weight), 0.5x total BV ex. DTA (25%
weight), and 6.9x our 2022 EPS estimate (25% weight). This yields a fair value for
the business of $34. To this, we add $5 for the DTA. We corroborate our price target
with a sum-of-the-parts analysis, which suggests a valuation range of $37 to $40 for
AIG using comparable trading multiples.

Risks to Rating and Price Target

In our opinion, AIG could outperform the sector or exceed our price target if:

 P&C margins improve at a faster pace than expected. P&C margins should
improve as AIG re-prices cases, pulls back from certain product lines, and uses
more reinsurance. If AIG is able to remediate the P&C book at a faster pace or
the pricing environment improves, there could be upside to our forecasts. A 1%
change in the combined ratio affects EPS by about $0.22.
 Life & retirement results improve. Although AIG’s P&C underwriting margins
have begun to recover, results in life & retirement remain lackluster. If flows and
margins in the business begin to improve, investor sentiment could become more
positive.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Conversely, we believe that AIG would underperform the group if:

 P&C margins improve at a slower than assumed pace. Management expects

the general insurance business to generate underwriting profits, driven by cost
reductions, re-pricing/reinsurance initiatives, and premium growth (particularly in
U.S. commercial). If AIG’s results suggest that this goal is not attainable, there
could be downside risk to EPS estimates and investor sentiment on the stock.
 The P&C business reports adverse reserve development. Management is
confident in the adequacy of P&C reserves, but AIG has a history of adverse
reserve development, especially in its longer-tail lines. Recurring unfavorable
development, either on the legacy business or due to adverse business
interruption court judgements, would pressure results as well as hurt investor
sentiment on the stock.
 AIG announces a large acquisition. Management has expressed interest in
acquisitions, and the announcement of a sizable transaction would likely drive
reductions in EPS and ROE forecasts to the extent that capital is diverted from
potential share repurchases. AIG spent $5.6 billion on its most recent deal,
Validus, which closed in July 2018.
 Regulatory scrutiny of 403(b) business increases. Regulators such as the SEC
and state attorneys general are investigating sales practices in the 403(b) market,
the focus of AIG’s group retirement business (13% of earnings). An unfavorable
outcome from the investigations could result in fines or potentially disruptive
changes in current sales and/or business practices.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Aon
Overweight
Aon Plc (AON;AON US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY21E FY22E
Shares O/S (mn) 229 Revenue ($ mn) -
52-week range ($) 238.19- Adj. EBITDA ($ mn) 2,009 2,207 2,254 2,463 2,716
143.93 EBITDA margin - - - - -
Market cap ($ mn) 48,423.08 Adj. net income ($ mn) 2,009 2,207 2,254 2,463 2,716
Exchange rate 1.00 Adj. EPS ($) 8.13 9.17 9.67 10.75 12.00
Free float(%) 97.8% BBG EPS ($) 8.14 9.13 9.64 10.61 11.82
3M - Avg daily vol (mn) 1.54 Reported EPS ($) - - - - -
3M - Avg daily val ($ 311.2 DPS ($) 1.56 1.72 1.78 1.86 1.96
mn) Dividend yield 0.7% 0.8% 0.8% 0.9% 0.9%
Volatility (90 Day) 25 Adj. P/E 26.0 23.0 21.9 19.7 17.6
Index S&P 500 Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.
BBG BUY|HOLD|SELL 6|9|2

L-T View Upbeat; Deal Uncertainty Creating Attractive Upside

Our long-term outlook for AON is positive, and we believe that uncertainty
about the WLTW deal has created an attractive entry point in the stock. We
view AON as a top-tier competitor in attractive markets. In our opinion, re/insurance
brokerage and employee benefits consulting, AON’s major target markets, are
structurally superior businesses relative to insurance underwriting in the long run.
These businesses do not require a large balance sheet, are not exposed to actuarial
risk, and generate strong cash flows. Improving re/insurance pricing presents a
tailwind to results in the near-term as well, although less so than for underwriters.
While not immune, we feel that the brokerage business is less susceptible than
re/insurance underwriters to the after-effects of the COVID-related crisis, including
an economic slowdown, a likely uptick in credit defaults, lower interest rates, and
potential COVID-related claims. Results in the near term are likely to be held back
by the weaker economy, but we project AON to generate mid-single-digit organic
growth and gradual margin expansion over time. This, along with M&A and share
buybacks should drive double-digit EPS growth in the long run. The stock’s
valuation is not overly depressed, but seems reasonable following its recent under-
performance versus most re/insurers. Uncertainty about the pending WLTW
transaction, especially related to the regulatory approval process, has contributed to
AON’s weaker performance compared with other brokerage stocks as well, which we
feel presents an attractive opportunity for investors willing to look beyond the next
couple of quarters. Although concerns about potential dispositions to secure
regulatory approval are valid, we expect any revenue dis-synergies from the deal to
be more than offset by expense synergies. As a result, we forecast the company to
generate higher margin expansion and better EPS growth in the next few years versus
other large brokerage peers, including MMC, AJG, and BRO. Furthermore, we
expect the stock’s multiple to expand slightly if the deal breaks.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Fourth Quarter 2020 & 2021 Outlook

We are slightly reducing our 4Q20 EPS estimate from $2.50 to $2.48 while
Adjusting EPS Estimates maintaining our 2021 forecast at $10.75. Our revised model reflects an increase in
4Q20E: from $2.50 to $2.48 estimates for compensation and benefits expenses in 4Q20 as management resumes
operational spending that was halted at the onset of COVID-related shutdowns. We
2021E: $10.75 (no change)
project AON to report healthy results in both 4Q20 and in 2021, marked by a gradual
2022E: $12.00 (no change) improvement in organic growth and steady margin expansion. Our model assumes
0% organic growth in 4Q20, same as in 3Q20, improving to +2.6% in 2021.

Arthur J. Gallagher’s investor day in December 2020 affirms our view that organic
growth for global commercial brokers has bottomed and is poised for a recovery in
the next few quarters. Besides an expected improvement in organic growth,
Gallagher’s management noted that it expected its brokerage business to benefit from
continued price increases. Gallagher expects organic growth to accelerate from +3%
in 1Q21 to mid-single-digit/pre-pandemic level by 4Q21. Improved economic
conditions should help results in the consulting business as well.

Below are our forecasts for the primary metrics we expect investors to focus on when
analyzing AON’s results in 4Q20 and in 2021. Besides reported results, we expect
investors to focus on management’s commentary on progress in securing required
regulatory approvals and completing the Willis acquisition.

Table 11: 4Q20 & 2021 Estimated J.P. Morgan Model Forecasts
2Q20 3Q20 4Q20E 2020E 2021E

Segments
Commercial Risk Solutions 1,126 1,042 1,344 4,658 4,798
Reinsurance Solutions 448 321 200 1,817 1,999
Retirement Solutions 393 468 484 1,742 1,709
Health Solutions 258 282 573 1,615 1,662
Data & Analytics 274 278 268 1,151 1,131
Eliminations (2) (6) (2) (15) (16)
Total Revenues 2,497 2,385 2,868 10,969 11,283

Total Adjusted Operating Income 670 534 787 3,139 3,363

Interest expense (89) (80) (80) (332) (320)

Adj. tax expense (100) (92) (124) (528) (533)

Weighted average dilutive shares 233.6 233.5 231.0 233.2 229.1

Adjusted Operating EPS $1.96 $1.53 $2.48 $9.67 $10.75

Source: Company reports and J.P. Morgan estimates.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 12: 4Q20 & 2021 Estimated Key Financial Metrics

2Q20 3Q20 4Q20E 2020E 2021E

Total revenue 2,497 2,385 2,868 10,969 11,283

% change (y-o-y) -4% 0% -1% 0% 3%

Total expenses 1,903 1,944 2,120 8,153 8,060

% change (y-o-y) -13% -4% -10% -8% -1%

Operating margin 23.8% 18.5% 26.1% 25.7% 28.6%

Adjusted operating margin 26.8% 22.4% 27.5% 28.6% 29.8%

Organic growth (%) -1% 0% 0% 1% 3%

Adj. tax rate 17.5% 20.2% 17.5% 18.6% 17.5%

Share buybacks ($ mil.) - 500 800 1,760 700

Source: Company reports and J.P. Morgan estimates.

Operating Performance
 We forecast overall organic growth of 0% in 4Q20, consistent with results in
3Q20, improving to +2.6% in 2021.
 Our model assumes slight contraction in adjusted operating margins from 27.9%
in 4Q19 to 27.5% in 4Q20. For 2021, we are assuming operating margins of
29.8%, up from 28.6% in 2020. Our current forecasts do not incorporate the
impact of the Willis acquisition, which we expect to be dilutive to adjusted EPS
in 2021 (-12%) and accretive in 2022 (+8%).

Segment 4QE Organic 2020E Organic 2021E Organic

Growth (%) Growth (%) Growth (%)
Commercial Risk Solutions +2.0% +2.0% +3.0%
Reinsurance Solutions +8.0% +10.0% +10.0%
Retirement Solutions -3.0% -2.0% -1.0%
Health Solutions -1.0% -3.0% +2.0%
Data & Analytics -8.0% -6.0% -2.0%
Source: J. P. Morgan estimates.

Capital Management
 We forecast AON to repurchase $800 million of stock in 4Q20 and $700 million
in 2021, versus $450 million in 4Q19 and $1.8 billion in 2020.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Investment Thesis, Valuation and Risks

Aon Plc (Overweight; Price Target: $228.00)
Investment Thesis
We reiterate our Overweight rating. Our fundamental outlook for Aon is positive,
and we view the company as a top-tier competitor in attractive markets. We consider
insurance and reinsurance brokerage, the company’s primary business, a structurally
superior business in the long run compared with insurance underwriting. In addition,
Aon is one of the major competitors in the retirement and healthcare consulting
markets and is among the leading private health exchange sponsors. Furthermore, we
expect the company to be more proactive with share buybacks than its larger peers in
the long run. On a cautious note, near-term growth should be held back by the
weaker economy, although Aon’s results should hold up better than most
underwriters’. Also, as with other brokers, we are wary of Aon’s poor earnings
quality (i.e., significant use of non-GAAP adjustments to derive operating income).
Still, we believe that the company’s strong franchise, defensive business mix, and the
stock’s relative valuation offer attractive risk-reward, especially following its recent
underperfomance due to uncertainty related to the Willis deal.

Valuation
Aon currently trades at 19.2x our 2021E adjusted EPS of $10.75, below all large
peers except Willis (peer group average is 21.8x). Aon’s TTM free cash flow margin
is 23% versus the median of 23% and average of 21% of all publically traded
commercial brokers (Aon, Marsh & McLennan, Willis Towers Watson, Arthur J.
Gallagher and Brown & Brown). We maintain our Dec 2021 price target of $228
based on 19x 2022E adjusted EPS of $12.00, which is slightly above the historical
average based on our expectation of strong organic growth and free cash flow as well
as anticipated expansion in adjusted operating margins in the long run.

Risks to Rating and Price Target

We consider the following as the key risks to our rating and price target:

 A sharp economic recovery. Given Aon’s defensive business mix, the

company’s results could lag insurance underwriters’ (compared with investor
expectations) if concerns about credit deterioration and sustained low rates end
up abating relatively soon.
 Aon raises the offer for the WLTW deal. While the likelihood is low, it is
possible that the company raises the offer price for the Willis acquisition. In our
view, this would reduce potential accretion from the transaction as well as hurt
investor sentiment on the stock.
 Potential dis-synergies from the Willis transaction are greater than assumed.
We expect the stock to perform poorly if the integration of the acquired business
entailed high dis-synergies or if either company’s organic growth suffers
materially prior to the closing of the deal. In addition, there is a risk of regulators
asking Aon to shed significant operations in order to obtain antitrust approval.
 Increased competition from the larger MMC/JLT or upstart brokers. The
ongoing wave of industry consolidation among brokers has led to larger
competitors with more robust offerings (Marsh & McLennan) as well as upstart

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

competitors (Lockton Re, McGill & Partners) attempting to poach high-level

talent and subsequently leverage those personal relationships to win market share.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Arch Capital
Neutral
Arch Capital Group Ltd. (ACGL;ACGL US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 406 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 48.32-20.93 NEP (Premium) ($ mn) 5,232 5,786 7,057 6,911 8,351 8,328 - 9,461
Market cap ($ mn) 14,645.10 Operating income ($ mn) 1,438 1,664 928 932 1,499 1,590 - 1,841
Exchange rate 1.00 Adj. net income ($ mn) 909 1,163 505 509 1,002 1,087 - 1,322
Free float(%) 96.9% Combined ratio (27.2%) (26.2%) (40.8%) (40.8%) (36.0%) (31.6%) - (30.9%)
3M - Avg daily vol (mn) 2.05 Adj. EPS ($) 2.20 2.82 1.23 1.24 2.43 2.65 - 3.19
3M - Avg daily val ($ 67.1 BBG EPS ($) 2.12 2.75 - 1.27 - 2.79 - 3.34
mn) Reported EPS ($) 1.73 3.87 2.45 2.46 2.38 2.65 - 3.19
Volatility (90 Day) 35 DPS ($) 0.00 0.00 0.00 0.00 0.00 0.00 - 0.00
Index S&P 500 Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% - 0.0%
BBG BUY|HOLD|SELL 7|4|1 Adj. P/E 16.4 12.8 29.3 29.1 14.8 13.6 - 11.3
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

Housing Market Weakness a Key Concern

We consider Arch a premier franchise, but are Neutral due to a cautious long-
term view of the reinsurance market and its exposure to a possible recession. In
our view, ACGL has an industry-leading reinsurance business that should generate
superior, and less volatile underwriting margins in the long run given the company’s
unique culture and approach to the market. In addition, Arch has established itself as
one of the top competitors in the mortgage insurance business. We forecast near term
results in the P&C reinsurance business to benefit from firming pricing, but our long
term view of the market remains downbeat. Meanwhile, our long-term view of the
MI market is mixed, and we believe that near-term results in the business, which has
accounted for over two-thirds of Arch’s total earnings in recent years, are susceptible
to a potential recession. Still, Arch has been among the worst performing stocks in
the P&C sector this year, and its underperformance creates attractive risk-reward in
the stock, especially if the U.S. housing market remains stable.

Fourth Quarter 2020 & 2021 Outlook

Raising EPS Estimates We are increasing our 4Q20 EPS estimate from $0.44 to $0.45 and our 2021
4Q20E: from $0.44 to $0.45 forecast from $2.43 to $2.65. The key changes to our model include better margins
in the MI business and an upward revision in our assumption for FY21 premium
2021E: from $2.43 to $2.65
growth in the insurance and reinsurance segments, mitigated somewhat by higher
2022E: from $3.02 to $3.19 catastrophe exposure. Besides reported results, we expect investors to be interested in
management commentary on pricing and loss trends in the re/insurance and mortgage
insurance markets. Our model does not reflect the potential impact of the WTRE
deal, which we believe will be slightly dilutive to EPS, but accretive to book value.

Following are our projections for the key metrics we expect investors to focus on in
analyzing the company’s results.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 13: 4Q20 & 2021 Estimated Operating Metrics

2Q20 3Q20 4Q20E 2020E 2021E

Underwriting Income by Division:

Mortgage 76 131 168 572 816
Insurance (57) (31) (10) (126) 49
Reinsurance (33) 6 18 (19) 223
Other (9) (8) (8) (31) (27)
Underwriting income (23) 97 167 396 1,060

Net investment income 131 129 131 536 530

Interest expense 31 41 41 146 164

Income tax expense 26 24 22 100 129

Weighted avg. dilutive shares 408.1 409.2 409.3 410.2 410.9

Operating EPS $0.04 $0.29 $0.45 $1.24 $2.65

Source: Company reports and J.P. Morgan estimates.

Table 14: 4Q20 & 2021 Estimated Key Financial Metrics

2Q20 3Q20 4Q20E 2020E 2021E

Net premiums written 1,668 1,874 1,696 7,376 8,855

% change (y-o-y) 15.5% 16.2% 16.5% 22.1% 20.1%

Net investment income 131 129 131 536 530

% change (y-o-y) -15.2% -20.4% -15.1% -14.6% -1.1%

Loss ratio ex cats and PYD 63.3% 59.9% 57.8% 59.7% 57.7%
Catastrophe losses 12.5% 11.5% 7.5% 9.5% 3.8%
PYD (favorable) / unfavorable -1.9% -2.7% -1.5% -1.8% -2.0%
Loss ratio 73.9% 68.7% 63.8% 67.5% 59.5%

Expense ratio 27.9% 26.2% 26.8% 27.1% 28.1%

Combined ratio 101.8% 94.9% 90.6% 94.6% 87.5%

Combined ratio ex cats & PYD 91.2% 86.0% 84.6% 86.9% 85.8%

Share buybacks ($ mil.) - - - 75 -

Source: Company reports and J.P. Morgan estimates.

Operating Performance
 Our model forecasts +16.5% growth in net written premiums in 4Q20 and 20.1%
in 2021, reflecting low-single-digit growth in mortgage, mid-teen growth in
insurance, and robust growth in the reinsurance segment.
 We project ACGL’s reported P&C combined ratio (reinsurance and insurance) to
deteriorate y/y to 90.6% in 4Q20 versus 79.5% in 4Q19. Similarly, we estimate
that the underlying combined ratio will deteriorate to 84.6% versus 81.3% in
4Q19. Within the underlying combined ratio, we estimate 7.5 CR pts of
catastrophe losses and 1.5 CR pts of favorable prior year reserve development.
For 2021, we are assuming a P&C combined ratio of 87.5% in 2021 (85.8% ex.
cats and PYD) versus 94.6% (86.9% ex. cats and PYD) in 2020.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Net Investment Income

 We project ACGL to generate net investment income of $131 million in the
fourth quarter of this year, down 15.1% from 4Q19. In 2021, investment income
is expected to be $530 million in 2021, compared with $536 million in 2020.
Capital Management
 Our model assumes no share repurchases in the fourth quarter of 2020 and in
2021, as we expect management to continue exhibiting conservatism due to
COVID-related economic concerns as well as a desire to allocate capital to
expanding its P&C re/insurance business.

Investment Thesis, Valuation and Risks

Arch Capital Group Ltd. (Neutral; Price Target: $36.00)
Investment Thesis
We consider Arch a premier reinsurance and MI franchise, but our Neutral rating
reflects a cautious stance on the broader markets. In our view, ACGL has an
industry-leading reinsurance business that we project to generate superior, and less
volatile, underwriting margins in the long run given the company’s unique culture
and approach to the market. While firming reinsurance rates are a near-term tailwind,
we remain skeptical of sustained hardening. In addition, Arch has established itself as
one of the leading competitors in the mortgage insurance business. Our long-term
view of the MI market is mixed, but results in the business, which has accounted for
over two-thirds of Arch’s total earnings in recent years, are susceptible to the weak
economy. Furthermore, we feel that the stock’s valuation is full given the company’s
ROE and growth potential. ACGL has a devoted following among investors, but its
overall ROE has been, and should remain, fairly modest, primarily due to modest
returns in the reinsurance business and poor margins in the insurance division.

Valuation
We assess Arch’s valuation on several metrics. ACGL trades at 1.2x BV and 14.6x
2021E EPS compared to 1.1x and 11.7x for the reinsurance sector and 0.9x and 9.5x
for mortgage insurance peers. We also increase our Dec 2021 price target to $36
from $30 based off a 1.1x multiple on our 12/31/21E BV forecast and a 12.0x
multiple on our 2022 EPS estimate. These target multiples reflect the company’s
current business mix, which has become more skewed to mortgage insurance in
recent years. Although mortgage insurance continues to generate higher returns than
re/insurance, especially on legacy business from 2009 to 2016, we believe that an
uptick in competition in the mortgage insurance market has contributed to a drop in
multiples for MI stocks over time. We corroborate our price target by a sum-of-the-
parts analysis that values ACGL’s re/insurance business separately from mortgage
insurance.

Risks to Rating and Price Target

In our opinion, ACGL could outperform and exceed our price target if:

 The pricing environment continues to improve. Higher catastrophe losses in

2017 and 2018 have led to a pricing uptick in several lines of business, including
reinsurance as well as primary specialty, and casualty. Sustained improvement
could drive upside to our EPS estimates as well as lift sentiment on the stock.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

 Management is able to achieve its targets for insurance underwriting

margins. In our view, investor sentiment will improve when ACGL is able to
improve its insurance combined ratio from ~100% to the low to mid-90s, which
seems to be better than assumed in our and consensus models currently.

We feel that the stock could underperform the group and fail to reach our target if:

 The housing market deteriorates. Given Arch’s growing exposure to mortgage

insurance and the more systematic nature of mortgage insurance risk, rising
housing defaults are likely to have a major negative impact on sentiment.
 Improvement in reinsurance pricing does not sustain. Although primary and
reinsurance pricing has been improving since 2018, we do not anticipate
sustained hardening. A reversal in pricing trends could drive downside risk in
EPS estimates as well as dampen sentiment on the sector.
 The pace of reserve development moderates. Favorable reserve development
has been a notable contributor to ACGL’s results in recent years. A slowdown in
the pace of development could pressure margins and returns.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Chubb Ltd
Neutral
Chubb Ltd (CB;CB US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 451 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 167.74-87.35 Operating income ($ mn) 6,133 6,308 4,527 4,641 6,597 6,767 - 7,005
Market cap ($ mn) 69,475.82 Adj. PBT ($ mn) 5,151 5,453 3,646 3,761 5,717 5,905 - 6,166
Exchange rate 1.00 Adj. net income ($ mn) 4,407 4,641 3,055 3,151 4,856 4,960 - 5,180
Free float(%) 86.5% Combined ratio 90.6% 90.6% 96.7% 96.4% 90.4% 90.2% - 90.2%
3M - Avg daily vol (mn) 1.91 Adj. EPS ($) 9.44 10.11 6.74 6.95 10.75 11.01 - 11.63
3M - Avg daily val ($ 266.6 BBG EPS ($) 9.41 10.04 - 6.94 - 11.47 - 12.30
mn) Reported EPS ($) 8.49 9.71 4.97 5.18 10.36 10.61 - 11.24
Volatility (90 Day) 32 DPS ($) 2.88 2.98 3.09 3.09 3.21 3.21 - 3.33
Index S&P 500 Dividend yield 1.9% 1.9% 2.0% 2.0% 2.1% 2.1% - 2.2%
BBG BUY|HOLD|SELL 14|7|1 Adj. P/E 16.3 15.2 22.8 22.1 14.3 14.0 - 13.2
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

Fundamental Outlook Upbeat, but Valuation Curbs Enthusiasm

We are downgrading CB from Overweight to Neutral. Our fundamental outlook
for the company remains upbeat and we consider CB is a superior franchise given its
top-tier commercial lines business, unique HNW business, and exposure to high-
growth foreign markets. In our opinion, the company’s scale, disciplined
underwriting, and management’s nimble approach with product mix will enable it to
sustain top-tier underwriting margins over time. Furthermore, we believe that CB’s
diverse product mix and strong balance sheet position it better than most peers to
take advantage of hardening re/insurance pricing. However, these factors seem to be
better reflected in the stock’s valuation following its sharp recovery in 4Q20. CB
trades at sizable premiums to most commercial liens peers on both P/BV and P/E
despite a slightly lower ROE. Concerns about BI claims created compelling upside in
the stock in mid-2020, but the risk-reward seems more balanced at current levels.
Other than a potential spike in BI claims, which seems unlikely, management’s
interest in a potential large acquisition presents a key risk to the stock. Still, our
overall view of the company is constructive and we feel that CB is the best stock for
those seeking to invest on the firming pricing theme. Continued hardening of
re/insurance pricing, better visibility into a potential improvement in ROE, or a
pullback in the stock would make us more upbeat on CB.

Fourth Quarter 2020 & 2021 Outlook

Raising EPS Estimates We are increasing our 4Q20 EPS estimate from $2.60 to $2.82 and our 2021
4Q20E: from $2.60 to $2.82 projection from $10.75 to $11.01. Our revised model reflects lower weather-related
cat losses during 4Q20. In addition, our revised 2021 estimates incorporate higher
2021E: from $10.75 to $11.01
than previously assumed margins in the commercial lines and reinsurance businesses,
2022E: from $11.20 to $11.63 driven by improved pricing trends.

Besides reported results, we expect investors to be interested in management’s

commentary on COVID-related claims exposure and the sustainability of the firming
pricing environment. Following are our forecasts for the major financial metrics we
expect investors to focus on when analyzing Chubb’s performance:

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 15: 4Q20 & 2021 Estimated Operating Metrics

2Q20 3Q20 4Q20E 2020E 2021E

Pretax Income by Division:

North America Commercial (120) 783 1,051 2,677 3,948
North America Personal 194 18 235 712 766
North America Agriculture 31 65 112 224 403
Overseas General Insurance (51) 367 256 850 1,313
Global Reinsurance 98 53 79 343 343
Life Insurance 87 104 98 383 384
Corporate (539) (311) (311) (1,433) (1,252)
Pretax income (300) 1,079 1,521 3,757 5,905

Income tax expense (46) 172 242 605 945

Weighted avg. dilutive shares 451.4 453.3 454.0 453.3 450.6

Operating EPS ($0.56) $2.00 $2.82 $6.95 $11.01

Source: Company reports and J.P. Morgan estimates.

Table 16: 4Q20 & 2021 Estimated Key Financial Metrics

2Q20 3Q20 4Q20E 2020E 2021E

Net written premiums 7,736 8,468 7,961 31,497 33,587

% change (y-o-y) -0.4% 5.7% 8.0% 5.4% 6.6%

Adj. investment inc. (ex. Life) 762 805 800 3,165 3,173
% change (y-o-y) -5.3% -1.6% 0.3% -1.5% 0.3%

Loss ratio ex cats and PYD 60.5% 59.7% 58.3% 59.2% 58.8%
Catastrophe losses 23.7% 11.3% 5.2% 11.0% 6.2%
PYD (favorable) / unfavorable 1.0% -1.8% -2.8% -1.3% -2.0%
Loss ratio 85.2% 69.2% 60.7% 68.8% 63.0%

Expense ratio 27.2% 26.0% 28.2% 27.6% 27.2%

Combined ratio 112.3% 95.2% 88.9% 96.4% 90.2%

Combined ratio ex cats & PYD 87.4% 85.7% 86.5% 86.8% 86.0%

Share buybacks ($ mil.) - - 200 526 1,200

Source: Company reports and J.P. Morgan estimates.

P&C Operating Performance

 We forecast +8.0% y/y growth in P&C net written premiums during 4Q20 and
+6.6% in 2021. Premium growth should benefit from management increasing its
exposures to take advantage of improved re/insurance pricing.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Segment 4QE NPW 2020E NPW 2021E NPW

Growth (%) Growth (%) Growth (%)
North America +12.2% +9.2% +8.2%
Commercial
North America +4.8% +3.3% +2.2%
Personal
North America -19.4% +0.9% +4.3%
Agriculture
Overseas General +6.1% +1.3% +5.8%
Global Reinsurance +17.1% +13.0% +21.2%
Source: J. P. Morgan estimates.

 Our model projects CB’s reported P&C combined ratio to improve y/y to 88.9%
in 4Q20 versus 92.7% in 4Q19. Similarly, we expect the underlying combined
ratio (ex. cats and PYD) to improve to 86.5% versus 90.0% in 4Q19. Within the
underlying combined ratio, we estimate 5.2 CR pts of catastrophe losses and 2.8
CR pts of favorable prior year reserve development. For 2021, we are assuming a
P&C combined ratio of 90.2% (86.0% ex. cats and PYD), down from 96.4%
(86.8% ex. cats and PYD) in 2020.

Life Division Results

 We forecast the life insurance division to generate income of $101 million in
4Q20 versus $90 million a year ago. For 2021, we project the business to earn
$384 million, roughly flat with 2020.
Net Investment Income
 In our view, CB will earn net investment income (ex. life insurance division) of
$895 million in 4Q20, relatively close to the level in 4Q19. In 2021, we are
assuming net investment income of $3.2 billion, up modestly from 2020 as the
benefit of strong premium growth is offset by lower new money yields.
Capital Management
 Our model assumes share repurchases of $200 million in 4Q20 and $1.2 billion in
2021 compared with $310 million in 4Q19 and $526 million in 2020.

Investment Thesis, Valuation and Risks

Chubb Ltd (Neutral; Price Target: $155.00)
Investment Thesis
We are downgrading CB from Overweight to Neutral. Our fundamental outlook for
the company remains positive, and we believe that CB is still the best name for investors
seeking to take advantage of the firming pricing theme. We consider Chubb a superior
franchise in the P&C sector given its strong brand, differentiated commercial lines

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

business, unique personal lines division, and exposure to fast growing international
markets. In our opinion, the company’s scale, disciplined underwriting, and
management’s nimble approach with product mix will enable it to sustain top-tier
underwriting margins. CB’s diverse product mix and strong balance sheet position it
better than most peers to benefit from hardening pricing in the commercial re/insurance
market. On the other hand, the company’s overall financial profile is fairly average, and,
despite generating best-in-class margins, we project Chubb’s ROE to stay close to the
sector average of roughly 10%. We are also concerned about the company’s exposure to
the tough tort environment as well as potentially dilutive acquisitions. Also, valuation is
less enticing following the stock’s significant recovery in 4Q20.
Valuation
Chubb trades at 1.2x P/BV and 14.1x 2021E EPS compared to 1.1x and 13.4x for its
commercial P&C peers. We increase our Dec 21 price target to $155 from $152 based off
a 1.3x multiple on our 12/31/21E BV and a 12.0x multiple on our 2022 EPS estimate.
Our target multiples for Chubb reflect its in-line ROE (even after adjusting for the impact
of private equity returns) and better than average growth potential (given its exposure to
higher growth market segments and geographies). Unlike other commercial P&C
companies (AIG, TRV), Chubb does not reflect all of its private equity returns in
operating income, which we estimate would add an additional 40-50 bps to ROE on a
run-rate basis. Even with this adjustment, however, Chubb’s ROE is only in line with
peers’ because of the drag from acquisition-related items (intangible amortization in
earnings, goodwill in equity). Valuing Chubb on the basis of tangible equity results in a
similar price target, as the higher ROE and implied book multiple is computed off a lower
equity base.
Risks to Rating and Price Target
In our opinion, CB could outperform the sector and exceed our price target if:
 The pace of price increases in the commercial re/insurance market picks up
or sustains for an extended period. Pricing in the primary P&C market has
been improving since 2018. We believe that CB is better positioned than peers to
take advantage of the trend, which bodes well for EPS estimates as well as
investor sentiment on the stock.
 There is better clarity into business interruption claims. If BI claims are
modest and there is better clarity on insurers’ ultimate payouts, potentially due to
an favorable outcome of court cases, sentiment on the stock would improve and
the valuation multiple could expand further.
Conversely, we feel that the stock could underperform and fail to reach our price target if:
 Management pursues a large acquisition. We expect Chubb to remain
acquisitive, especially in geographies/business lines where it wants to expand its
current footprint (Asia and Latin America). Large deals would entail integration
risks as well as divert capital from potential share buybacks. Also, given
competition for deals in foreign markets, we feel that management is more likely
to overpay for deals, especially if they enhance the company’s business.
 Margins in the U.S. personal lines business do not improve. Growth in the
U.S. personal lines business has been lackluster, and Chubb is re-pricing its book
to respond to elevated homeowners’ claims. A lack of improvement in the
personal lines combined ratio could drive reductions in EPS forecasts and hurt
investor sentiment on the stock.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Hartford Financial Services

Overweight
Hartford Financial Services (HIG;HIG US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY21E FY21E FY22E
Shares O/S (mn) 360 (Prev) (Curr)
52-week range ($) 61.32-19.04 Operating income ($ mn) 2,136 2,651 2,466 2,446 2,552
Market cap ($ mn) 17,652.39 Adj. PBT ($ mn) 1,838 2,392 2,229 2,214 2,320 -
Exchange rate 1.00 Adj. net income ($ mn) 1,576 2,062 1,923 1,811 1,890 -
Free float(%) 99.6% Combined ratio 32.0% 33.5% 33.1% 33.9% 33.2% -
3M - Avg daily vol (mn) 2.42 Adj. EPS ($) 4.33 5.65 5.33 5.10 5.30 -
3M - Avg daily val ($ 103.4 BBG EPS ($) 4.12 5.55 5.34 - 5.43 6.04
mn) Reported EPS ($) 4.95 5.66 4.82 4.92 5.30 -
Volatility (90 Day) 40 DPS ($) 1.10 1.20 1.28 1.38 1.41
Index S&P 500 Dividend yield 2.2% 2.4% 2.6% 2.8% 2.9% -
BBG BUY|HOLD|SELL 14|4|0 Adj. P/E 11.3 8.7 9.2 9.6 9.2 -
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

Improving Business Outlook & Discount P/BV Merit Bullish View

We are upgrading HIG from Neutral to Overweight. In our view, stabilization of
workers’ comp. pricing, an acceleration in share buybacks, and eased uncertainty
about BI claims will help narrow the stock’s valuation discount to the sector.
Concerns about the company’s outsized exposure to the labor market and elevated
business interruption claims are valid, but we feel that these are more than reflected
in the stock’s valuation following its significant underperformance in 2020. Hartford
is more exposed to a spike in unemployment and/or BI claims than most peers, which
presents a key risk to our rating, but we feel that other commercial lines insurers are
not immune to these issues. Yet, HIG was one of the worst performing commercial
lines stocks last year, lagging peers such as TRV and CB by almost 20 percentage
points. So, we believe that either the broader commercial lines sub-segment is
overvalued or HIG stock is severely undervalued.

In our view, HIG has superior commercial lines and employee benefits
franchises and our fundamental outlook is relatively upbeat. We project
expanding commercial lines margins, a decline in group insurance claims, and strong
mutual fund results to drive HIG’s earnings in 2021. Workers’ comp. prices have
been steadily declining for the past few years, but we expect them to stabilize in
2021. This, coupled with improving pricing in specialty lines, should lift margins in
the company’s commercial lines division. Workers’ comp. is the largest line in HIG’s
commercial P&C division, accounting for approximately half of division premiums
and a quarter of overall company premiums (and a considerably greater proportion of
earnings given strong margins in the business). Prices in the line have been declining
for the past 5 years, but turned positive (albeit slightly) in mid-2020, and we expect
the trend to continue.

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Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 23: Workers’ Comp. Pricing Still Soft, but Seems to be Turning
Refers to CIAB premium pricing for various product lines
20%

15%

10%

5%

0%

-5%

-10%
1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

1Q17

3Q17

1Q18

3Q18

1Q19

3Q19

1Q20

3Q20
Workers' Compensation Commercial Property Commercial Auto Average

Source: The Council of Insurance Agents & Brokers. Average rate includes Commercial Auto, Workers’ Compensation, Commercial
Property, General Liability, Umbrella lines.

We expect results in 2021 to also be helped by an expected decline in COVID-related

deaths (a positive for the employee benefits division) and the lag effect of the equity
market recovery (a tailwind for mutual fund results. Personal lines margins should be
robust in the near term as well, but compress as the year progresses due to an
anticipated uptick in auto frequency. Furthermore, EPS growth should benefit from
an acceleration in share repurchases.

On a cautious note, HIG’s outsized exposure to the workers’ comp. and employee
benefits businesses (which account for over 50% of its earnings) make it more
susceptible than most peers to deterioration in the labor market. Additionally, the
company is exposed to an uptick in business interruption claims. Still, we feel that
these factors are more than reflected in the stock’s valuation, especially following its
significant underperformance last year. Other than AIG and CNA, HIG trades at
close to the lowest P/BV and P/E multiples in the commercial lines sub-segment, and
at sizable discounts to both CB and TRV despite a slightly higher projected ROE,
which we feel is unwarranted. We consider stabilization in workers’ comp. pricing,
an acceleration in share buybacks, and better clarity on business interruption claims
potential positive catalysts that will help narrow the stock’s valuation discount.

As shown in the charts below, HIG traded relatively close to the broker P&C sector
on P/BV and at a slight discount on PE since the disposition of its Talcott VA block
in late 2017. However, the stock’s relative valuation has compressed significantly
since and it trades at sizable discounts on both metrics, which we believe is
unjustified given the company’s roughly in-line ROE and growth potential.

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 Jimmy S. Bhullar, CFA North America Equity Research
(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Figure 24: HIG P/B vs P&C Insurance Index P/B Figure 25: HIG P/E vs P&C Insurance Index P/E
1.50x 16.0x

1.40x 15.0x
14.0x
1.30x
13.0x
1.20x
12.0x
1.10x 11.0x

1.00x 10.0x
9.0x
0.90x
8.0x
0.80x
7.0x
0.70x 6.0x
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20
HIG P&C Index HIG P&C Index

Source: Bloomberg Finance L.P. Source: Bloomberg Finance L.P.

Fourth Quarter 2020 & 2021 Outlook

Raising EPS Estimates We are increasing our 4Q20 EPS estimate from $1.30 to $1.31 and our 2021
4Q20E: from $1.30 to $1.31 forecast from $5.10 to $5. 30. Our revised model reflects the earlier than anticipated
resumption of share buybacks as well as better than previously assumed margins in
2021E: from $5.10 to $5.30
the commercial lines business, helped by improved pricing. Also, we are
2022E: from $5.40 to $5.64 incorporating elevated alternative investment income in 4Q20 and 1Q21, driven by
the lag effect of the strong equity market. On the other hand, we are assuming
elevated COVID-related claims in the group benefits business in the near term. Our
revised forecasts imply a roughly 2% quarterly increase in book value per share to
approximately $49 at the end of 4Q20 and $53 at year-end 2021.

Besides reported results, we expect investors to focus on management commentary

on workers’ comp. pricing, COVID-19 losses, and the likely pace of share
repurchases. Following are our forecasts for what we consider the key drivers of
Hartford’s performance in 4Q20 and in 2021.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 17: 4Q20 & 2021 Estimated Operating Metrics

2Q20 3Q20 4Q20E 2020E 2021E

P&C Commercial U/W Income -332.0 -26.7 64.2 -155.8 323.1

P&C Personal U/W Income 428.0 -14.0 71.8 654.8 215.4
P&C Other Underwriting Income -7.0 -3.0 -3.0 -26.0 -12.0
Total P&C Underwriting Income 89.0 -43.7 133.0 473.0 526.5

P&C Investment Income 242.0 331.5 350.0 1,297.0 1,334.3

P&C Other Items / Expenses 50.0 -2.9 -2.9 82.2 -20.0
P&C Pretax Income 381.0 284.9 480.1 1,852.1 1,840.8
P&C Taxes 72.0 53.4 88.8 333.8 340.5
P&C Core Income 309.0 231.5 391.3 1,518.3 1,500.2

Group Benefits Core Income 102.0 113.1 103.0 436.0 494.8

Mutual Funds Core Income 33.0 36.3 41.9 158.9 167.1

Corporate -1.0 -38.2 -57.0 -168.0 -189.3

Preferred dividends 5.0 5.0 6.0 22.0 24.0

Consolidated Core Income 438.0 337.7 473.2 1,923.2 1,948.8

Shares 359.3 358.1 361.6 360.6 345.8

Core EPS $1.22 $0.94 $1.31 $5.33 $5.64

Source: Company reports and J.P. Morgan estimates.

Table 18: 4Q20 & 2021 P&C Estimated Key Financial Metrics
2Q20 3Q20 4Q20E 2020E 2021E

P&C Segment
Net written premiums 2,903 2,905 2,917 11,952 12,012
% change (y-o-y) 0.0% -5.0% 0.5% 3.2% 0.9%

Net investment income 242 332 350 1,297 1,334

% change (y-o-y) -30.5% -7.4% -3.6% -6.8% 0.2%

Loss ratio ex cats and PYD 64.1% 59.1% 59.5% 60.6% 58.8%
Catastrophe losses 8.7% 10.2% 4.1% 5.7% 4.9%
PYD (favorable) / unfavorable -9.4% -0.4% -0.1% -2.7% -0.5%
Loss ratio 63.4% 68.8% 63.5% 63.5% 63.3%

Expense ratio 33.0% 32.2% 31.7% 32.0% 31.8%

Combined ratio 96.9% 101.5% 95.7% 96.1% 95.6%

Combined ratio ex cats & PYD 97.6% 91.8% 91.7% 93.1% 91.1%

Share buybacks ($ mil.) - - - 150 750

Source: Company reports and J.P. Morgan estimates.

Operating Performance
 We forecast roughly flat net written premiums in the P&C division (commercial
and personal lines) in both 4Q19 and 2021 as modest growth in the commercial
lines business is offset by a slight decline in personal lines. Although HIG’s
commercial lines premiums should increase, they are expected to lag growth
reported by most peers due to the company’s higher exposure to workers’ comp.
(where pricing remains more challenging than in other lines).

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Table 19: 4Q20 & 2021 Estimated P&C Commercial Growth Rates (y-o-y)
Segment 4QE NPW 2020E NPW 2021E NPW
Growth (%) Growth (%) Growth (%)
Small commercial +1.0% -2.1% +1.1%
Middle & large -1.0% -2.0% +0.3%
commercial
Global specialty +4.0% +41.9% +0.8%
Other +0.0% +2.4% +2.8%
Source: J.P. Morgan estimates.

Table 20: 4Q20 & 2021 Estimated P&C Personal/Consumer Growth Rates (y-o-y)
Segment 4QE NPW 2020E NPW 2021E NPW
Growth (%) Growth (%) Growth (%)
AARP direct +0.0% -4.0% -3.3%
AARP agency -6.0% -10.2% -8.3%
Agency -8.5% -12.3% -8.5%
Other +0.0% -8.8% -6.3%
Source: J.P. Morgan estimates.

 Our model projects HIG’s reported P&C combined ratio to improve to 95.7% in
4Q20 versus 98.1% during 4Q19. In addition, we estimate that the underlying
combined ratio will improve to 91.7% versus 95.8% during 4Q19. Within the
underlying combined ratio, we estimate 4.1 CR pts of catastrophe losses and
0.1 CR pts of favorable prior year reserve development. For 2021, we project a
P&C combined ratio of 95.8% (91.3% ex. cats and PYD) compared with 96.1%
(93.1% ex. cats and PYD) and expansion in commercial lines margins is partly
offset by compression in personal lines margins.
Net Investment Income
 We forecast HIG to generate total company investment income of $468 million in
4Q20 (-6.6% from 4Q19) and $1.8 billion in 2021 (+2.0% from 2020).
Investment income in both 4Q20 and 1Q21 should benefit from elevated returns
on alternatives, helped by the lag effect of the strong equity market in 3Q20 and
4Q20 (HIG reports returns on limited partnerships on a 1-quarter lag).
Trends in Group Benefits and Mutual Fund Businesses
 Results in the group benefits business should be suppressed by elevated COVID-
related group life claims in the near term, but improve in 2Q21 and thereafter.
Meanwhile, mutual fund division results in the near term should be strong, helped
by the recent equity market recovery.

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jimmy.s.bhullar@jpmorgan.com

Capital Management
 Our model assumes no share repurchases in 4Q20 and $750 million in 2021,
beginning in 1Q21. The company announced a new $1.5 billion buyback
authorization in December 2020 (expiring at year-end 2022), and management
indicated that it intends to resume activity after it reports 4Q20 results.

Investment Thesis, Valuation and Risks

Hartford Financial Services (Overweight; Price Target: $55.00)
Investment Thesis
We are upgrading HIG from Neutral to Overweight. We had been concerned
about the company’s high exposure to a weak labor market (given its presence in the
workers’ comp. and employee benefits markets), declining pricing in the workers’
comp. line (which accounts for almost half of HIG’s commercial lines premiums),
and a potential spike in business interruption claims (especially in the acquired
Navigators business). However, labor conditions have improved and workers’ comp.
pricing seems to be bottoming. Although BI claims remain an overhang, the
likelihood of a spike in losses has diminished and other stocks with exposure to the
issue have recovered. Yet, HIG has been among the worst performing commercial
lines stocks and has significantly lagged peers over the past year. We expect an
improvement in workers’ comp. pricing, acceleration of share repurchases, and better
clarity on BI claims to help narrow the stock’s valuation discount to the sector.

Valuation
HIG trades at 9.4x our 2021 EPS estimate and 1.0x BV compared to P&C sector
peers at 13.2x and 1.3x, respectively. We increase our Dec 21 price target to $55
from $52 based on multiples of 1.0x 12/31/21E BV ex. AOCI (50% weight), 1.0x
12/31/21E total BV (25%), and 11.0x 2022E EPS (25%), which we feel are
appropriate given the company’s ROE and growth potential.

Risks to Rating and Price Target

In our view, HIG could underperform the P&C sector and fail to reach our price
target if:

 Labor market conditions deteriorate. Employee benefits and workers’ comp.

are two of HIG’s largest businesses, accounting for over half of the company’s
earnings, and top-line growth as well as margins in these products lines are
sensitive to the labor market. High unemployment could pressure results in these
businesses and drive reductions in EPS forecasts.
 Business interruption claims spike. HIG has incurred significant business
interruption claims following the onset of COVID, especially in the acquired
Navigators business, where terms/conditions were not as tight and virus
exclusions were less prevalent. An uptick in claims would drive reductions in
EPS forecasts as well as hurt investor sentiment on the stock.
 Management pursues additional acquisitions. HIG’s recent history with large
acquisitions has been mixed. Although the Aetna acquisition has performed well,
results in the acquired Navigators business have been weaker than anticipated.

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jimmy.s.bhullar@jpmorgan.com

Additional deals would divert capital from share repurchases. This, and the
accompanying integration risk, could pressure the stock’s valuation.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Marsh & McLennan

Neutral
Marsh & McLennan Companies, Inc. (MMC;MMC US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 507 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 120.97-74.34 NEP (Premium) ($ mn) - - - - - - - -
Market cap ($ mn) 59,319.00 Operating income ($ mn) 2,225 2,382 2,541 2,528 2,716 2,716 - 2,966
Exchange rate 1.00 Adj. net income ($ mn) 2,225 2,382 2,541 2,528 2,716 2,716 - 2,966
Free float(%) 99.8% Combined ratio - - - - - - - -
3M - Avg daily vol (mn) 1.72 Adj. EPS ($) 4.35 4.66 4.97 4.94 5.30 5.30 - 5.80
3M - Avg daily val ($ 194.9 BBG EPS ($) 4.30 4.64 - 4.90 - 5.21 - 5.77
mn) Reported EPS ($) 4.35 4.66 4.97 4.94 5.30 5.30 - 5.80
Volatility (90 Day) 20 DPS ($) 1.58 1.74 1.84 1.84 1.94 1.89 - 1.94
Index S&P 500 Dividend yield 1.4% 1.5% 1.6% 1.6% 1.7% 1.6% - 1.7%
BBG BUY|HOLD|SELL 5|12|3 Adj. P/E 26.9 25.1 23.5 23.7 22.1 22.1 - 20.2
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

Fundamental Outlook Upbeat, but Valuation Appears Full

Our long-term view of MMC is positive and we expect the company to generate
healthy growth and margins in both its brokerage and consulting businesses. In
our opinion, re/insurance brokerage and consulting, Marsh’s primary target markets,
are structurally superior businesses than insurance underwriting. Additionally,
similar to re/insurance underwriters, brokers should benefit from firming commercial
lines and reinsurance pricing, and we feel that MMC’s dominant franchise positions
it better than most peers to take advantage of the trend. Our primary concerns include
ongoing weakness at Oliver Wyman (which accounts for about 13% of MMC
revenues) and sluggish growth in the defined benefit and employee benefits
businesses at Mercer given the economic environment. Furthermore, we feel that
brokerage stocks are considerably more expensive than they appear at first glance
due to their lower earnings quality and frequent use of non-GAAP adjustments when
deriving adjusted EPS, although MMC is less aggressive than large peers in this
regard. Valuation is not excessive given the company’s superior business profile, but
is not overly enticing either.

Fourth Quarter 2020 & 2021 Outlook

Adjusting EPS Estimates We are reducing our 4Q20 EPS estimate from $1.20 to $1.17, but are
4Q20E: from $1.20 to $1.17 maintaining our 2021 forecast of $5.30. The primary change to our model is a
modest reduction in our assumption for organic growth in 4Q20. In our opinion,
2021E: $5.30 (no change)
MMC will report relatively stable fourth quarter results as healthy operating trends in
2022E: $5.80 (no change) the risk brokerage business (e.g. hardening commercial lines pricing) offset ongoing
macroeconomic challenges in the consulting businesses, which tend to be more
cyclical. Results in the Oliver Wyman, asset management, and employee benefits
businesses are more susceptible to the macro environment than re/insurance
brokerage. We anticipate a gradual recovery in organic growth in the risk brokerage
business in 4Q20 and beyond, and expect results to benefit slightly from the tailwind
of firming re/insurance pricing.

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jimmy.s.bhullar@jpmorgan.com

Arthur J. Gallagher’s investor day in December 2020 helped reaffirm our view that
organic growth for global brokers has bottomed and is posed for recovery in the next
few quarters. AJG expects organic growth in its brokerage business to accelerate
from +3% in 1Q21 to mid-single-digit/pre-pandemic levels by 4Q21, helped by the
economic recovery and hardening pricing. Improved economic conditions bode well
for the consulting business as well.

Following are our forecasts for the key financial metrics we expect investors to focus
on when analyzing MMC’s performance in 4Q20 and 2021.

Table 21: 4Q20 & 2021 Estimated Operating Metrics

$ millions, except per share
2Q20 3Q20 4Q20E 2020E 2021E

Adjusted Operating Income by Segment

Risk and Insurance Services 762 388 576 2,658 2,893
Consulting 265 306 357 1,217 1,259
Total Adjusted Operating Income 675 418 600 2,528 2,716

Interest expense (132) (128) (127) (514) (508)

Weighted average dilutive shares 511.0 512.0 512.3 511.3 512.3

Adjusted Operating EPS $1.32 $0.82 $1.17 $4.94 $5.30

Source: Company reports and J.P. Morgan estimates.

Table 22: 4Q20 & 2021 Estimated Key Financial Metrics

$ millions, except per share
2Q20 3Q20 4Q20E 2020E 2021E

Total revenue 4,189 3,968 4,285 17,093 17,613

% change (y-o-y) -3.7% 0.0% 0.5% 2.6% 3.0%

Total expenses 3,304 3,428 3,409 13,722 13,692

% change (y-o-y) -9.9% -2.1% -7.2% -1.8% -0.2%

RIS Organic growth % 2% 2% 3% 3% 4%

RIS Operating margin 26.7% 14.5% 23.3% 23.9% 26.7%
RIS Adjusted operating margin 32.1% 20.2% 26.4% 28.8% 29.4%

Consulting Organic growth % -6% -4% -3% -3% -1%

Consulting Operating margin 15.8% 16.4% 19.5% 17.0% 18.3%
Consulting Adjusted operating margin 17.3% 18.9% 20.3% 17.6% 18.3%

Share buybacks ($ mil.) - - - - 375

Source: Company reports and J.P. Morgan estimates.

Operating Performance
 We forecast flat overall organic growth in 4Q20, down from +3% in 4Q19 but an
improvement from -1% in 3Q20. For 2021, our model projects organic growth of
slightly above +2% compared with +1% in 2020.

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jimmy.s.bhullar@jpmorgan.com

 Our model assumes adjusted income margins to remain mostly flat at 14.0%
during 4Q20. Meanwhile, we project adjusted margins to expand from 14.8% in
2020 to 15.4% in 2021.

Segment 4QE Organic 2020E Organic 2021E Growth

Growth (%) Growth (%) (%)
Marsh +3.0% +3.0% +4.0%
Guy Carpenter +6.0% +6.0% +8.0%
Mercer -3.0% -1.0% +0.0%
Oliver Wyman -4.0% -6.0% -2.0%
Source: J. P. Morgan estimates.

Capital Management
 We do not expect MMC to repurchase stock during 4Q20, reflecting management
conservatism in the midst of the COVID-19 pandemic, and assume a relatively
modest $375 million of buybacks in 2021.

Investment Thesis, Valuation and Risks

Marsh & McLennan Companies, Inc. (Neutral; Price Target:
$116.00)
Investment Thesis
We maintain our Neutral rating. Our long-term outlook for MMC is positive, and
we expect it to generate steady organic growth and gradual margin expansion in both
its brokerage and consulting businesses, where it has leading franchises. In our
opinion, re/insurance brokerage and consulting, MMC’s primary target markets, are
structurally superior businesses than the insurance underwriting business. In addition,
similar to re/insurance underwriters, brokers should benefit from firming commercial
lines and reinsurance pricing, and we feel that MMC’s dominant franchise positions
it better than most peers to take advantage of the trend. Our key concerns include
sluggish growth in the defined benefit business at Mercer and poor results at Oliver
Wyman as the economy enters a recession. Also, we believe that the stock’s
valuation is less compelling following its outperformance versus AON (its closest
peer) and most insurance underwriters. Despite these concerns, our overall view of
Marsh is constructive and we could get more bullish if our outlook for Oliver
Wyman and Mercer improves or if the stock pulls back.
Valuation
Our Dec 21 price target of $116 is based on 20x 2022E adjusted EPS of $5.80. We
expect Marsh & McLennan to generate slightly lower organic growth relative to
Aon, its most relevant publicly traded commercial brokerage peer, as MMC faces
near-term organic growth headwinds resulting from its recent acquisition of JLT.
However, we feel that the deal will enhance the company’s franchise in the long
term, add further scale and capabilities in its brokerage operations, supplement
organic growth, and drive margin expansion. MMC currently trades at 22x 2021E
operating EPS of $5.30, above the historical average of 19x, and in line with the peer
average of 22x. MMC’s TTM free cash flow margin is 16% versus the median of

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jimmy.s.bhullar@jpmorgan.com

23% and average of 21% of all publically traded commercial brokers (Aon, Marsh &
McLennan, Willis Towers Watson, Arthur J. Gallagher and Brown & Brown).

Risks to Rating and Price Target

We believe that MMC could outperform the sector and exceed our price target if:
 Organic growth at Oliver Wyman and Mercer accelerates. Both businesses
are exposed to a slowdown in the economy, and an uptick in organic growth
could drive increases in EPS estimates as well as lift sentiment for the stock.
 Business interruption claims spike. Higher business interruption claims, either
due to an adverse court case outcome or ongoing COVID-related disruption,
would pressure results for commercial re/insurers and potentially drive
outperformance for brokerage stocks.
Conversely, we feel that the major downside risks to our rating and price target are:
 JLT-related disruption lasts longer than anticipated. We expect MMC to
experience revenue dis-synergies related to the JLT acquisition as clients look to
diversify their brokerage exposure away from the larger combined entity. The
company has also lost several producers over the past few months (both
voluntarily and involuntarily). In addition, in order to secure the European
Commission’s approval for the deal, MMC had to sell JLT’s global aerospace
business to AJG (for £190 million). If the combined entity is unable to overcome
these revenue dis-synergies through growth in emerging product lines and
geographies, the deal could be considerably less accretive than assumed initially.
 A severe global economic slowdown that adversely impacts MMC’s
consulting or brokerage businesses. Like most insurance brokers, MMC is
highly leveraged to economic activity and changes in insured values and
exposure units. Moreover, MMC’s consulting businesses, especially Oliver
Wyman, make it more susceptible to an economic slowdown than most peers.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Progressive

Neutral
The Progressive Corporation (PGR;PGR US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 585 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 102.05-62.18 NEP (Premium) ($ mn) 30,933 36,192 39,490 39,490 43,544 44,247 - 47,659
Market cap ($ mn) 57,874.46 Operating income ($ mn) 3,486 5,554 7,786 7,791 4,773 4,795 - 4,877
Exchange rate 1.00 Adj. net income ($ mn) 2,912 3,130 4,275 4,279 3,393 3,375 - 3,407
Free float(%) 99.7% Combined ratio 90.6% 90.9% 85.5% 85.5% 91.8% 92.0% - 92.6%
3M - Avg daily vol (mn) 2.47 Adj. EPS ($) 4.96 5.33 7.28 7.28 5.75 5.75 - 5.79
3M - Avg daily val ($ 232.5 BBG EPS ($) 4.78 5.23 - 7.26 - 5.60 - 5.85
mn) Reported EPS ($) 4.42 6.72 10.24 10.25 5.70 5.75 - 5.79
Volatility (90 Day) 26 DPS ($) 2.52 2.65 2.55 4.90 2.74 2.85 - 2.95
Index S&P 500 Dividend yield 2.5% 2.7% 2.6% 5.0% 2.8% 2.9% - 3.0%
BBG BUY|HOLD|SELL 8|10|2 Adj. P/E 19.9 18.5 13.6 13.6 17.2 17.2 - 17.1
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

L-T View Upbeat, but Auto Pricing Curbs Our Enthusiasm

PGR should generate superior returns and growth in the long run, but we are
wary of potential margin compression and reductions in EPS forecasts. In our
opinion, PGR’s leading data analytics capabilities and superior digital distribution
platform are key competitive strengths that will enable it to generate top-tier margins
and returns as well as gain share in the personal auto insurance business. In addition,
we believe that the homeowners’ and small commercial markets present attractive
growth opportunities, albeit off a modest base. Furthermore, we believe that PGR is
defensively positioned in the current environment, as its personal auto focus makes it
a key beneficiary of social distancing and the ensuing decline in miles driven, which
is reducing loss frequency in the auto business. On the other hand, we are concerned
about a potential uptick in the combined ratio as management pursues growth amid
declining personal auto insurance pricing. We believe that more competitive auto
pricing will lift insurers’ retention rates and make it challenging for PGR to poach
consumers off competitors. This, in turn, could cause management to sacrifice
margins to gain share. Although the company’s margins should remain higher than
those at peers, they could decline off recent levels, driving reductions in EPS
forecasts. Our forecasts, which are relatively close to consensus projections, assume
a roughly 92% combined ratio in 2021. If the combined ratio rises to 94%, still a
very strong level, EPS estimates would decline by almost 20%. Nonetheless, our
long-term outlook for PGR remains constructive, and we could get more bullish on
the stock if consensus margin expectations become more conservative or if the stock
pulls back. Conversely, an ongoing uptick in competition in the auto line or the
stock’s further outperformance would make us incrementally negative.

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jimmy.s.bhullar@jpmorgan.com

Fourth Quarter 2020 & 2021 Outlook

Adjusting EPS Estimates We are maintaining our 4Q20 EPS estimate of $1.65 and our 2021 projection of
4Q20E: $1.65 (no change) $5.75. We expect Progressive’s results to continue to benefit from reduced frequency
trends in both personal and commercial auto lines in the near term, but forecast the
2021E: $5.75 (no change)
tailwind to abate as 2021 progresses. This, coupled with increasing competition in
2022E: from $5.90 to $5.79 the personal auto line, could drive reductions in EPS estimates over time, especially
in late 2021 and beyond.

Following are our forecasts for the major metrics we expect investors to focus on
when reviewing Progressive’s results.

Table 23: 4Q20 & 2021 Estimated Operating Metrics

$ millions, except per share
2Q20 3Q20 4Q20E 2020E 2021E

Underwriting Income By Segment

Personal Lines 1,199 1,115 976 4,365 3,180
Commercial Lines 180 156 68 516 418
Property Lines (189) (53) (3) (195) (30)
Total Underwriting Income 1,190 1,218 1,041 4,685 3,567

Net investment income 239 226 235 936 960

Weighted average dilutive shares 587.2 587.8 588.0 587.5 587.6

Operating EPS $1.84 $1.88 $1.65 $7.28 $5.75

Source: Company reports and J.P. Morgan estimates.

Table 24: 4Q20 & 2021 Estimated Key Financial Metrics

$ millions, except per share
2Q20 3Q20 4Q20E 2020E 2021E

Net written premiums 10,140 11,015 10,724 41,750 45,698

% change (y-o-y) 11.1% 14.5% 11.8% 11.1% 9.5%

Investment income 244 231 241 957 980

% change (y-o-y) 8.5% -12.4% -9.0% -8.2% 2.5%

Loss ratio ex cats and PYD 51.2% 64.5% 65.8% 61.2% 68.5%
Catastrophe losses 4.2% 2.8% 1.2% 2.3% 2.1%
PYD (favorable) / unfavorable -0.3% 0.0% 1.0% 0.6% 0.0%
Loss ratio 55.2% 67.3% 67.9% 64.0% 70.5%

Expense ratio 32.5% 20.5% 22.1% 21.4% 21.5%

Combined ratio 87.7% 87.8% 90.0% 85.5% 92.0%

Combined ratio ex cats & PYD 83.8% 85.0% 87.9% 82.6% 89.9%

Share buybacks ($ mil.) - 45 45 112 80

Source: Company reports and J.P. Morgan estimates.

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(1-212) 622-6397 04 January 2021
jimmy.s.bhullar@jpmorgan.com

Operating Performance
 We forecast net written premium growth of +11.8% in 4Q20, reflecting solid
growth in both the personal lines (+10.5%) and property lines (+12.0%),
combined with robust growth in the commercial (+20%) segment. For 2021, we
anticipate +9.5% premium growth, a slowdown from +11.1% in 2020, but strong
nonetheless, driven by healthy growth across all major divisions (personal lines
+8.4%, commercial +15.8%, property +10.2%).
 Our model projects PGR’s combined ratio to improve to 90.0% in 4Q20 versus
92.4% during 4Q19. Similarly, we estimate that the underlying combined ratio
will improve to 87.9% versus 91.1% during 4Q19. Within the underlying
combined ratio, we estimate 1.2 CR pts of catastrophe losses and 1.0 pts of
unfavorable prior year reserve development. Meanwhile, we expect the combined
ratio to be 92.0% in 2021 (89.9% ex. cats and PYD), a deterioration from the
unusually favorable 85.5% (82.6% ex. cats and PYD) in 2020, driven by an
uptick in miles driven and frequency, as well as higher competition in the
personal auto insurance market.
Net Investment Income
 In our view, PGR will generate net investment income of $235 million in 4Q20,
down 9.2% from the fourth quarter of 2019. In 2021, we project investment
income of $960 million, up +2.6% from 2020.
Capital Management
 Our model assumes share repurchases of $45 million in 4Q20 and $80 million in
2021 compared with no repurchases in 4Q19 and $113 million in 2020.

Investment Thesis, Valuation and Risks

The Progressive Corporation (Neutral; Price Target: $92.00)
Investment Thesis
Our long-term outlook for Progressive is positive, but we remain Neutral on the
stock. In our opinion, PGR’s leading data analytics capabilities and superior digital
distribution platform are key competitive strengths that will enable it to generate top-
tier margins and returns and continue to gain share in the personal auto insurance
business over the long-term. Current COVID-19 restrictions should lower frequency
and improve personal auto and commercial auto margins in the near-term. In
addition, we believe that the homeowners’ and small commercial markets present
attractive growth opportunities, albeit off a modest base. On the other hand, we are
concerned about margin compression (off very robust levels) and a slowdown in
personal auto PIF growth as industrywide rebates make drivers more reluctant to
switch carriers. This, in turn, will raise retention rates for peers and make it
challenging for PGR to gain share and maintain margins. Given its growth
expectations and valuation, we feel that PGR is more vulnerable to fewer
policyholders switching carriers than other personal lines insurers. Although the
company’s superior ROE and growth potential merit higher P/BV and P/E multiples,
we feel that this is fairly reflected in the current stock price. Still, our long-term view
of the company is relatively constructive, and we could get more positive on PGR if
expectations for margins become more conservative or if the stock pulls back. On the
other hand, an ongoing uptick in competition in the auto line or the stock’s further
outperformance would make us incrementally negative.

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jimmy.s.bhullar@jpmorgan.com

Valuation
We believe that PGR’s better returns and faster EPS growth potential merit a
premium valuation, but we feel that this is fairly reflected in the stock’s current
multiples. An analysis of PGR’s valuation using various metrics (relative to its
returns, versus the company’s historical multiple, and compared to the overall
market) suggests that the stock is fairly valued. Our primary valuation metric is
price-to-book value, consistent with that for other P&C underwriters. In deriving our
price target, we also weight P/E, but to a lesser extent.

PGR is currently trading at 3.2x P/BV and 16.9x 2021E EPS, a significant premium
to 1.7x and 12.8x for the personal lines peer group. Our December 2021 price target
of $92 is based on a 3.0x multiple on our 12/31/21E BV forecast (75% weight) and a
16.0x multiple on our 2022 EPS estimate (25% weight), higher than those used for
peers given the company’s superior ROE and growth potential. Compared with its
historical levels, Progressive is trading above average on a P/BV basis and lower on
a P/E basis. We attribute the increase in the stock’s P/BV multiple to an acceleration
of net written premium growth from 10% in 2015 to 14% in 2016, 16% in 2017, 20%
in 2018 and 15% in 2019. This, coupled with an improvement in underwriting
margins, has driven an expansion in the company’s ROE from approximately 13% in
2016 to 27% in 2019. Meanwhile, the stock’s P/E multiple has been relatively
consistent, in the 15-17x range, for over the past decade.

Risks to Rating and Price Target

In our view, PGR could outperform the sector and exceed our price target if:
 PGR continues to gain share in the personal lines market at a consistent pace
as in the past. Our model projects the company to gain share, but at a more
modest pace than in recent years. Faster than assumed growth in the personal
lines business could drive upward revisions in EPS forecasts and further increase
the stock’s valuation premium over peers.
 The company’s expansion in business owners and general insurance is as
successful as in commercial auto. We expect the company to gain share in both
the business owners policy (BOP) and general liability lines but do not envision
similar growth and profitability as management was able to achieve in
commercial auto. However, successful expansion in new market could drive
upward revision in our EPS estimates as well as boost sentiment on the stock.
 Reinsurance and commercial lines pricing gets more competitive. Increasing
competition in the reinsurance and commercial lines market could help personal
lines carriers be relative outperformers in the broader P&C sector.

Conversely, we feel that PGR could underperform the sector if:

 Personal auto pricing gets aggressive. We feel that increasing competition in
the personal auto market presents a bigger threat to PGR than some of its peers
such as ALL. Historically, the company has gained more share when competitors
are raising prices than when pricing is competitive. EPS estimates for PGR are
more dependent on it continuing to gain share, which would become harder if
intense competition leads to higher retention rates at auto insurers.
 Personal auto PIF growth slows. Growth in Progressive’s personal auto policies
in force (PIF) likely peaked during 2Q18 (at 16%), and we expect it to slow.
However, our forecasts for top-line growth would need to be revised lower if the

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jimmy.s.bhullar@jpmorgan.com

change in PIF turns negative. Besides pressuring EPS estimates, this could hurt
investor sentiment on the stock.
 Expansion into broader commercial market encounters hurdles or
dramatically alters PGR’s business mix. Although we view PGR’s expansion
into commercial lines as an attractive growth opportunity, we feel that the
company’s key attribute, superior data analytics, is not as easily transferable to
commercial accounts, especially mid and large case clients. Margins in the
company’s business owners or general liability books could develop poorly over
time. Also, a shift in mix toward products where PGR does not enjoy the same
competitive edge as in personal auto could compress its valuation premium.

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jimmy.s.bhullar@jpmorgan.com

RenaissanceRe

Underweight
RenaissanceRe Holdings Ltd. (RNR;RNR US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 51 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 202.68- NEP (Premium) ($ mn) 1,976 3,338 3,956 3,956 4,447 5,832 - 5,239
113.27 Operating income ($ mn) 507 680 404 506 1,043 1,057 - 1,127
Market cap ($ mn) 8,425.31 Adj. net income ($ mn) 347 394 99 179 678 679 - 745
Exchange rate 1.00 Combined ratio 87.6% 92.3% 98.8% 96.2% 84.8% 87.9% - 85.8%
Free float(%) 98.4% Adj. EPS ($) 8.73 9.13 2.09 3.79 13.46 13.46 - 14.68
3M - Avg daily vol (mn) 0.29 BBG EPS ($) 6.65 9.38 - 4.12 - 14.95 - 18.09
3M - Avg daily val ($ 49.6 Reported EPS ($) 4.91 16.30 11.53 13.23 13.04 13.37 - 14.58
mn) DPS ($) 1.32 1.36 1.40 1.40 1.47 1.44 - 1.48
Volatility (90 Day) 27 Dividend yield 0.8% 0.8% 0.8% 0.8% 0.9% 0.9% - 0.9%
Index RUSSELL Adj. P/E 19.0 18.2 79.3 43.7 12.3 12.3 - 11.3
2000 Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.
BBG BUY|HOLD|SELL 3|7|1

Pricing Positive; L-T Trends, Sentiment, & Valuation Concerns

Hardening prices should lift RenRe’s near-term results, but our long-term view
of the reinsurance market is negative and we feel that RNR’s valuation is full. In
our opinion, RenRe has leading property cat and alternative capital franchises, but
our long-term outlook for these markets is downbeat. RenRe’s more sophisticated
modeling capabilities are a notable competitive advantage and differentiator in
underwriting catastrophe risk. Also, the company’s ventures unit is a market leader in
providing an underwriting platform to third parties, allowing RNR to earn fees that
account for close to a quarter of the company’s earnings. On a cautious note, we feel
that increased competition in the catastrophe market and other re/insurers’ increased
willingness to partner with third-party capital have diminished, although not
eliminated, RNR’s historical competitive advantages. Management has been trying to
diversify the company’s business mix towards specialty and casualty lines through
both organic growth and M&A, but despite ongoing diversification, the company’s
business mix remains highly skewed towards cat risk. We expect RenRe to generate
a top-tier ROE among reinsurers, but with greater volatility. Furthermore, investor
sentiment on the stock seems very positive, and despite generating a single-digit
ROE and marginal book value growth for the past several years, the stock trades at a
sizable premium to book value. Hence, although optimistic about pricing, we believe
that the risk-reward in the stock is negatively skewed.

Fourth Quarter 2020 & 2021 Outlook

Adjusting EPS Estimates We are increasing our 4Q20 EPS estimate from $0.30 to $1.90 but are
4Q20E: from $0.30 to $1.90 maintaining our 2021 projection at $13.46. Our revised model reflects reduced cat
losses attributed to California wildfires compared with our previous assumption in
2021E: $13.46 (no change)
the fourth quarter of 2020.
2022E: $14.68 (no change)
Following are our projections for the key metrics we expect investors to focus on
with RNR’s results. Besides reported results, investors are likely to be interested in

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jimmy.s.bhullar@jpmorgan.com

management commentary on the sustainability of the hardening market as well as on

potential COVID-related claims in 2021.

Table 25: 4Q20 & 2021 Estimated Operating Metrics

$ millions, except per share

2Q20 3Q20 4Q20E 2020E 2021E

Underwriting Income by Division:

Catastrophe 166 (179) 37 182 611
Other Property 35 (28) 16 12 80
Casualty & Specialty 16 1 21 (45) 16
Underwriting income 217 (206) 74 149 707

Net investment income 89 84 84 356 350

Corporate expenses 12 48 24 100 134

Income tax expense 12 12 12 50 47

Weighted avg. dilutive shares 45.0 50.1 50.2 47.2 50.5

Operating EPS $4.06 ($2.64) $1.90 $3.79 $13.46

Source: Company reports and J.P. Morgan estimates.

Table 26: 4Q20 & 2021 Estimated Key Financial Metrics

$ millions, except per share

2Q20 3Q20 4Q20E 2020E 2021E

Net earned premiums 1,181 899 782 4,132 4,875

% change (y-o-y) 14.8% 55.3% 30.7% 23.1% 22.0%

Net investment income 89 84 84 356 350

% change (y-o-y) -22.9% -26.6% -25.4% -15.9% -1.8%

Loss ratio ex cats and PYD 52.0% 57.3% 51.3% 55.2% 54.1%
Catastrophe losses 0.0% 42.2% 16.5% 15.0% 6.3%
PYD (favorable) / unfavorable -1.5% -5.4% -2.4% -2.0% -1.4%
Loss ratio 50.5% 94.2% 65.4% 68.2% 59.1%

Expense ratio 28.0% 26.4% 27.4% 28.0% 28.8%

Combined ratio 78.5% 120.6% 92.8% 96.2% 87.9%

Combined ratio ex cats & PYD 80.0% 83.8% 78.7% 83.3% 83.0%

Share buybacks ($ mil.) - - - 63 -

Source: Company reports and J.P. Morgan estimates.

Operating Performance
 Our model forecasts +30.7% y/y net written premiums growth in 4Q20 and
+22.0% growth in 2021, helped by the tailwind from hardening pricing in all of
the company’s major reporting divisions.

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Segment 4QE NPW 2020E NPW 2021E NPW

Growth (%) Growth (%) Growth (%)
Catastrophe +27.3% +18.6% +20.1%
Other Property +18.8% +30.3% +20.0%
Casualty and +1.6% +20.6% +15.9%
Specialty
Source: J. P. Morgan estimates.

 We estimate that RNR’s reported P&C combined ratio will improve to 92.8% in
4Q20 versus 106.7% during 4Q19. For 2021, we project a combined ratio of
87.9%, a marked improvement from 92.8% in 2020. Given RenRe's focus on cat
risk, we evaluate the company's results more on a reported combined ratio basis,
not on combined ratio ex. cats’ and development.
Net Investment Income
 We project RNR to generate net investment income of $84 million (-25.4% y/y)
in 4Q20 and $350 million in 2021 (-1.8% vs. 2020).
Capital Management
 In our opinion, RNR will not repurchase stock in 4Q20 or in 2021.

Investment Thesis, Valuation and Risks

RenaissanceRe Holdings Ltd. (Underweight; Price Target: $162.00)
Investment Thesis
We view RNR’s leading property cat and alternative capital franchises positively, but
our outlook for these markets is downbeat. RenRe’s more sophisticated modeling
capabilities represent a notable competitive advantage and differentiator in
underwriting catastrophe risk. Also, the company’s ventures unit is a market leader in
providing an underwriting platform to third parties, allowing RNR to earn fees that
account for almost a quarter of the company’s earnings. On a cautious note, we feel
that increased competition in the catastrophe market and other re/insurers’ increased
willingness to partner with third-party capital have diminished, although not
eliminated, RNR’s historical competitive advantages. Management has been trying to
diversify the company’s business mix toward specialty and casualty lines, where it
sees better opportunities, through both organic growth and M&A. Despite ongoing
diversification, the company’s business mix remains highly skewed toward cat risk,
which is likely to drive high volatility in income. Investor sentiment on RNR is very
bullish, mostly on the firming pricing theme, and the stock’s valuation seems
excessive relative to its long-term return profile.

Valuation
We are raising our Dec 21 price target from $160 to $162 to reflect the revision in
our EPS and BV forecasts. RNR trades at 1.2x P/BV and 12.2x 2021E EPS
compared to 1.1x and 11.7x for the reinsurance sector. Our price target assumes a
1.1x multiple on our 12/31/21E BV forecast and a 11.0x multiple on our 2022 EPS

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jimmy.s.bhullar@jpmorgan.com

estimate. The target multiples are based on our expectations for RNR’s ROE and
growth potential given its recent acquisitions of Platinum Partners and Tokio Marine
Re, which diversify the company’s business mix and reduce its reliance on property
cat risk. Overall, we expect RNR’s growth to improve as it is able to write more
coverage in lines of business where pricing pressure is not as acute as in property
catastrophe. However, while the deals should reduce volatility in RNR’s results, they
are also likely to hurt its prospective ROE given lower expected returns in lines less
exposed to cats. RNR is trading close to its long-term valuation multiple of 1.3x on
book value, but above its multiple of 9.3x on forward EPS.

Risks to Rating and Price Target

We consider the following the key risks to our rating and price target:

 Reinsurance pricing, particularly for catastrophe coverage, hardens further.

Higher catastrophe losses in 2017 and 2018 has led to a gradual hardening in
catastrophe pricing. Sustained improvement in pricing could drive upside to our
EPS estimates as well as lift sentiment on the stock.
 M&A activity in the reinsurance market boosts RNR’s valuation. The
reinsurance industry has continued to consolidate in recent years. In addition, in
late 2018 a long-time equity holder called on Renaissance to explore a potential
sale. Although RNR’s recent acquisitions (Platinum Underwriters and Tokio
Marine Re) make it a less likely acquisition target, we believe that continued
M&A activity in the reinsurance market will likely benefit RNR’s stock price.
 Margins in casualty/specialty business improve at a faster pace than
expected. If renewal pricing, investment income from the acquired Tokio
Marine’s re-positioned asset portfolio, and expense synergies are better than
expected, the earnings and ROE contribution of the deal could be higher than
assumed, which bodes well for the stock.
 Reserve development remains favorable, consistent with the recent trend.
RNR is conservative with its initial loss picks and has reported steady favorable
reserve development over the past several years. Our model assumes ongoing
favorable development, but less so than in recent years. Continued favorable
PYD at the recent pace could drive upward revisions in EPS and BV forecasts.

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jimmy.s.bhullar@jpmorgan.com

Travelers Cos

Underweight
The Travelers Companies, Inc. (TRV;TRV US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 253 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 141.87-76.99 NEP (Premium) ($ mn) 27,059 28,272 28,951 28,951 29,796 29,992 - 30,674
Market cap ($ mn) 35,555.72 Operating income ($ mn) 3,397 3,528 2,972 3,078 3,553 3,537 - 3,627
Exchange rate 1.00 Adj. net income ($ mn) 2,411 2,518 2,126 2,217 2,599 2,637 - 2,703
Free float(%) 99.6% Combined ratio 97.4% 97.1% 97.9% 97.5% 96.8% 96.0% - 95.9%
3M - Avg daily vol (mn) 1.46 Adj. EPS ($) 8.94 9.57 8.32 8.67 10.34 10.34 - 10.90
3M - Avg daily val ($ 185.8 BBG EPS ($) 8.92 9.59 - 8.73 - 10.48 - 11.34
mn) Reported EPS ($) 9.28 9.89 8.10 8.45 10.03 10.34 - 10.90
Volatility (90 Day) 29 DPS ($) 3.04 3.23 3.37 3.37 3.54 3.49 - 3.55
Index S&P 500 Dividend yield 2.2% 2.3% 2.4% 2.4% 2.5% 2.5% - 2.5%
BBG BUY|HOLD|SELL 6|12|4 Adj. P/E 15.7 14.7 16.9 16.2 13.6 13.6 - 12.9
Source: Company data, Bloomberg Finance L.P., J.P. Morgan estimates.

Strong Franchise, but N-T Headwinds & Valuation Concerns

Our cautious stance on TRV reflects near-term macro and fundamental
headwinds facing the business and the stock’s valuation. In our view, TRV’s
small and mid-market focus is a positive in the long run, but a concern in the current
environment. We believe that insurers that primarily target small and mid-markets
(HIG and TRV) are more exposed to a recession than those positioned in large
commercial lines (AIG and CB). A potentially deep recession would drive reductions
in top-line growth forecasts and earnings for most insurers and brokers, but
underwriters targeting smaller businesses are likely to be more vulnerable in the
current environment. Also, recent pricing increases in the small and mid-sized
market have been less pronounced than those for larger accounts, partly due to
greater discipline by large-case competitors such as AIG and Lloyd’s, and we expect
the trend to continue into 2021. These factors, coupled with a challenging tort
environment and a diminishing benefit from favorable reserve development, are
likely to constrain EPS growth. Our 2021 and 2022 EPS forecasts are below
consensus levels, which seem optimistic. Conversely, our near term outlook for the
company’s personal lines business is upbeat, and we expect results to benefit from
lower miles driven as well as ongoing repricing of the homeowners’ book. However,
the division accounts for only 10% of Travelers’ earnings. Fewer cars on highways
and streets should reduce loss frequency in the commercial auto line as well, but
problems in the business have centered more on severity, which remains a major
long-term headwind. The stock’s valuation appears full as well, especially following
its recovery in 4Q20.

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jimmy.s.bhullar@jpmorgan.com

Fourth Quarter 2020 & 2021 Outlook

Adjusting EPS Estimates We are increasing our 4Q20 EPS estimate from $2.80 to $3.15, and are
4Q20E: from $2.80 to $3.15 maintaining our 2021 projection at $10.34. Our increased 4Q20 estimate reflects
lower than previously assumed cat losses. Our model implies 2% sequential growth
2021E: $10.34 (no change)
in book value per share to roughly $112 in 4Q20 and 5% growth in 2021 to $117.
2022E: $10.90 (no change)
Following are our projections for the major financial metrics we expect investors to
focus on with TRV’s 4Q20 and 2021 results:

Table 27: 4Q20 & 2021 Estimated Operating Metrics

$ millions, except per share
2Q20 3Q20 4Q20E 2020E 2021E

Operating Income by Division:

Business Insurance (58) 365 431 1,027 1,418
Bond & Specialty 72 115 96 405 546
Personal Insurance 10 392 357 1,095 991
Corporate (74) (74) (76) (295) (300)
Total Operating Income (50) 798 809 2,233 2,655

Share-based awards / pref.

dividends 1 6 5 17 18

Weighted average dilutive shares 251.6 254.3 255.7 255.8 255.2

Operating EPS ($0.20) $3.12 $3.15 $8.67 $10.34

Source: Company reports and J.P. Morgan estimates.

Table 28: 4Q20 & 2021 Estimated Key Financial Metrics

$ millions, except per share

2Q20 3Q20 4Q20 2020E 2021E

Net written premiums 7,346 7,771 7,087 29,550 30,279

% change (y-o-y) -1.4% 2.7% 0.2% 1.4% 2.5%

Net investment income 268 671 575 2,125 2,103

% change (y-o-y) -58.6% 7.9% -6.7% -13.9% -1.0%

Loss ratio ex cats and PYD 60.4% 62.2% 60.6% 61.1% 59.8%
Catastrophe losses 12.3% 5.3% 2.4% 6.1% 5.3%
PYD (favorable) / unfavorable 0.0% -1.9% -0.3% -0.7% 0.0%
Loss ratio 72.7% 65.6% 62.6% 66.5% 65.1%

Expense ratio 31.0% 29.3% 31.0% 30.3% 30.2%

Combined ratio 103.7% 94.9% 93.7% 96.8% 95.3%

Combined ratio ex cats & PYD 91.4% 91.5% 91.6% 91.4% 90.0%

Share buybacks ($ mil.) - - - 471 1,000

Source: Company reports and J.P. Morgan estimates.

Operating Performance
 We forecast +0.2% y/y net written premiums growth in 4Q20, reflecting slight
declines in Business Insurance, offset by modest growth in Bond & Specialty and

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Personal Insurance. In 2021, premium growth should improve +2.5% y/y, helped
in part by easy comps and partly by firming pricing.

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Segment 4QE NPW 2020E NPW 2021E NPW

Growth (%) Growth (%) Growth (%)
Business Insurance -1.6% -1.2% +1.7%
Bond & Specialty +3.1% +5.4% +3.5%
Personal Insurance +1.9% +4.1% +3.3%
Source: J. P. Morgan estimates.

 Our model projects TRV’s overall combined ratio to deteriorate slightly in 4Q20
to 93.7% versus 92.4% in 4Q19. Conversely, we estimate that the underlying
combined ratio will improve slightly to 91.6% versus 92.1% during 4Q19. Within
the underlying combined ratio, we estimate 2.4 CR pts of catastrophe losses and
0.3 CR pts of favorable prior year reserve development. For 2021, we are
assuming a consolidated combined ratio of 95.3% (90.0% ex. cats and PYD), an
improvement from 96.8% (91.4% ex. cats and PYD) in 2020.
Pricing
 We anticipate ongoing momentum in renewal pricing in the business insurance
division in 4Q20 and early 2021, moderating as the year progresses. Business
insurance renewal rates accelerated to +8.2% in 3Q20 from +7.4% in 2Q20.
Net Investment Income
 We project TRV to generate 4Q net investment income of $575 million (-6.7%
compared with 4Q19) and $2.1 billion in 2021 (-1.0%). Investment income in the
near term should benefit from robust returns on alternative investments, driven by
the lag effect of the strong equity market in 3Q20 and 4Q20. TRV reports returns
on partnership investments on a one-quarter lag.
Capital Management
 Our model assumes no share repurchases in 4Q20 versus $376 million in 4Q19.
However, we expect TRV to resume share repurchases in 2Q21 and our model
reflects buybacks of $1.0 billion in 2021 compared with $471 million in 2020.

Investment Thesis, Valuation and Risks

The Travelers Companies, Inc. (Underweight; Price Target: $136.00)
Investment Thesis
We maintain our Underweight rating. Our cautious stance on TRV reflects
concerns about a sustained poor ROE, lackluster business trends, and potential risk to
EPS estimates. In our opinion, Travelers is a top-tier commercial lines franchise,
especially in the small and mid-case segments. The company derives over three-
fourths of its earnings from the business insurance and bond & specialty segments,
where margins and top-line growth should benefit from hardening prices. Our
outlook for the personal lines business is relatively upbeat as well, and we expect
ongoing repricing of the homeowners’ book to drive an improvement in results. On a
cautious note, we are concerned about the company’s high exposure to the workers’
comp. market, where we anticipate continued margin compression (off high levels),
and to commercial auto, where we expect ongoing poor margins (off already
depressed levels). Workers’ comp. and commercial auto together account for almost
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a quarter of the company’s total premiums. In addition, we expect a challenging tort

environment and a diminishing benefit from favorable reserve development to hold
back EPS growth. Furthermore, we believe that TRV’s small and mid market focus
makes it more vulnerable to a recession than most peers.

Valuation
TRV is currently trading at 1.3x BV and 13.5x our 2021 EPS forecast, versus the
sector averages of 1.1x and 13.4x, respectively. We increase our Dec 21 price target
to $136 from $129, reflecting a 1.2x multiple (vs. the historical average of 1.3x) on
our 12/31/21E BV forecast (70% weight) and a 12.0x multiple (in line with the
historical average) on our 2022 EPS estimate (30% weight). We feel these levels are
reasonable given the company’s near-term business trends as well as long-term ROE
and earnings growth.

Risks to Rating and Price Target

We consider the following as the key upside risks to our rating and price target:

 Pricing environment in the commercial lines market hardens further:

Improving pricing could help margins and earnings as well as boost investor
sentiment on the stock.
 The company continues to report steady favorable reserve development. Our
model projects the company’s reserves to continue to develop favorably, but we
expect the magnitude to moderate. If results remain consistent with recent years,
there could be upside to our forecasts for margins and earnings.
 Workers’ comp. prices stabilize and begin to improve: Workers’ comp. is the
largest product line in TRV’s business insurance division. We expect margins in
the business to decline, albeit off very high levels, due to lower prices. However,
an improvement in pricing in the line would refute one of our primary concerns
with the stock and could drive upward revisions in our EPS forecasts.

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jimmy.s.bhullar@jpmorgan.com

Trean Insurance Group

Neutral
Trean Insurance Group, Inc. (TIG;TIG US)
Company Data Year-end Dec ($) FY18A FY19A FY20E FY20E FY21E FY21E FY22E FY22E
Shares O/S (mn) 51 (Prev) (Curr) (Prev) (Curr) (Prev) (Curr)
52-week range ($) 17.90-9.90 NEP (Premium) ($ mn) 67 86 104 105 214 206 261 255
Market cap ($ mn) 669.41 Operating income ($ mn) 20 23 11 11 52 51 64 62
Exchange rate 1.00 Adj. net income ($ mn) 22 30 30 31 51 48 61 57
Free float(%) 16.3% Combined ratio 23.6% 29.5% 40.7% 41.1% 21.4% 21.4% 19.7% 19.7%
3M - Avg daily vol (mn) 0.08 Adj. EPS ($) 0.59 0.79 0.60 0.68 0.93 0.93 1.12 1.12
3M - Avg daily val ($ 1.0 BBG EPS ($) - - - 0.63 - 0.93 - 1.12
mn) Reported EPS ($) 0.52 0.74 1.80 2.00 0.93 0.93 1.12 1.12
Volatility (90 Day) 70 DPS ($) - - - - - - - -
Index RUSSELL Dividend yield - - - - - - - -
2000 Adj. P/E 22.1 16.6 21.8 19.3 14.1 14.1 11.7 11.7
BBG BUY|HOLD|SELL 3|1|0 Source: Company data, Bloomberg, J.P. Morgan estimates.

Fundamentals Healthy & Valuation Attractive; Economy a Risk

Our fundamental outlook for TIG is upbeat and we project the company to
generate strong premium growth and margins over time. Also, we feel that the
stock’s valuation is compelling. Concerns about the company’s exposure to an
economic slowdown and, to a lesser extent, potential stock sales by large holders
following the expiration of the IPO-related lockup in mid-January are the key factors
keeping us from being even more bullish. Still, we believe that the stock presents
attractive risk-reward overall. Our model projects TIG’s premiums to increase at a
double-digit rate, outpacing growth at its workers’ comp peers (AMSF and EIG) as
well as the broader P&C market, driven by distribution expansion, growth in non-
workers’ comp lines of business, and an increase in its retention levels. In addition,
we forecast the company to generate healthy returns, helped by its fee-based income
(5-10% of revenues) and robust (albeit declining) margins in the workers’ comp
business. On a cautious note, we view the sluggish economy and continued pricing
pressure in workers’ compensation as major risks for both premium growth and
margins. Also, potential sales by key investors could pressure the stock, especially
given its low liquidity. Nonetheless, our overall view of TIG is positive and it is one
of the preferred names among our Neutral-rated stocks.

Fourth Quarter 2020 & 2021 Outlook

Adjusting EPS Estimates We are increasing our 4Q20 operating EPS forecast at $0.17 to $0.18, but are
4Q20E: from $0.17 to $0.18 maintaining our 2021 projection at $0.93. The major change to our model is a
greater than previously assumed benefit from favorable reserve development in 4Q20
2021E: $0.93 (no change)
given the company's detailed reserve review. We believe that this is not fully
2022E: $1.12 (no change) reflected in the consensus fourth quarter forecast, which is below our projection.
Besides reported results, we expect investors to focus on (1) the pace of Trean’s
distribution expansion (ramp of current partners, pipeline for new partners and/or
deals), (2) its progress growing non-workers’ comp business lines, and (3) pricing,
claims, and volume trends in the workers’ comp market (particularly in CA, which is
the company’s predominant exposure).

Following are our forecasts for what we consider to be the primary financial metrics
in analyzing Trean’s results.

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Table 29: 4Q20 & 2021 Estimated Operating Metrics

$ in millions and per share
2Q20 3Q20 4Q20E 2020E 2021E

Income Statement
Underwriting income (loss) 0.9 (7.2) 7.6 2.7 40.9
Net investment income 1.5 1.9 1.9 8.6 9.9
Fee income 1.6 5.6 2.1 13.7 11.2
Interest expense (0.5) (0.5) (0.4) (1.9) (1.5)
Non-operating adjustments 2.6 13.6 0.2 16.5 (0.3)
Pre-tax adjusted income 6.1 13.4 11.5 39.6 60.2

Taxes 1.3 2.9 2.4 8.7 12.6

Adjusted after-tax income 4.8 10.5 9.1 30.9 47.6

Weighted average dilutive shares 37.4 49.1 51.1 45.6 51.1

Adjusted EPS $0.13 $0.21 $0.18 $0.68 $0.93

Source: Company reports and J.P. Morgan estimates.

Table 30: 4Q20 & 2021 Estimated Underwriting Metrics

$ in millions and %
2Q20 3Q20 4Q20E 2020E 2021E

Underwriting income (loss) 0.9 (7.2) 7.6 2.7 40.9

Gross premiums written 109.6 132.3 130.2 480.0 597.3

% growth 5.0% 23.0% 33.0% 16.7% 24.4%

Retention ratio (%) 21.3% 25.5% 27.0% 24.2% 35.0%

Net premiums earned 21.4 27.9 33.2 104.9 205.9

% growth -8.5% 25.7% 55.9% 21.3% 96.3%

Loss ratio 57.0% 55.9% 55.5% 56.3% 58.7%

Accident year losses 60.9% 57.0% 59.5% 59.8% 60.0%
Favorable (unfavorable) -3.9% -1.1% -4.0% -3.5% -1.3%
PYD
Catastrophe losses 0.0% 0.0% 0.0% 0.0% 0.0%

Expense ratio 38.9% 69.9% 21.5% 41.1% 21.4%

Combined ratio 95.9% 125.8% 77.0% 97.4% 80.1%

Source: Company reports and J.P. Morgan estimates.

Underwriting Performance
 In our view, TIG will report gross written premium growth of 33.0% in 4Q20 and
24.4% in 2021. Net earned premiums are projected to increase 55.9% and 96.3%,
respectively. Our model assumes a net retention ratio of 27.0% in 4Q20 and
35.0% in 2021 compared to 20.8% in 4Q19 and 24.2% in 2020.
 We forecast TIG to report combined ratios of 77.0% in 4Q20 and 80.1% in 2021,
and our model assumes favorable prior year development of 4.0% and 1.3%,
respectively. Our model reflects fairly sizable favorable reserve development in

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4Q20 as part of the company’s detailed reserve review, which we feel is not fully
reflected in consensus projections (part of this could be offset by a higher
expense accrual to compensate distributors for favorable underwriting
performance). In 4Q19, TIG recognized favorable prior year development of
$6.9 million, amounting to roughly 32 CR points. Reflecting the challenging
workers’ comp pricing environment, we are assuming a gradual deterioration in
the accident year loss ratio and a slowdown in the pace of favorable reserve
development in 2021, partly offset by modest improvement in the expense ratio.
Net Investment Income and Fee Income
 We forecast net investment income of $1.9 million in 4Q20, up 17.0% from
4Q19, and $9.9 million in 2021, up 14.7% from 2020. Fee revenues are projected
to be $2.0 million in 4Q20, up 90.0% from 4Q19, and $11.1 million in 2020,
down 16.9% from 2020.

Investment Thesis, Valuation and Risks

Trean Insurance Group, Inc. (Neutral; Price Target: $17.00)
Investment Thesis
Our overall view of Trean is relatively upbeat, but we remain Neutral on the stock.
Our fundamental outlook for the company is constructive, and we believe that it has
several levers to drive robust growth and healthy returns. Also, valuation seems
compelling following the stock’s significant pullback since its IPO. Concerns about a
sustained weak economy and pricing pressure in the workers’ compensation line,
which accounts for over 80% of the company’s earnings, are the key factors keeping
us from being more bullish on the stock.

Valuation
We are modestly reducing our year-end 2021 price target from $18 to $17. Our
price target is computed based on multiples of 15x 2022E EPS (30% weight), 2x
2021E book value (50% weight), and 3x 2021E tangible book value forecast (20%
weight). This compares to current trading multiples of 14x 2021E earnings and 1.7x
current book value. By comparison, AMSF trades at 19x 2021E earnings and 2.3x
9/30/20 book value, EIG at 17x 2021E earnings and 0.8x 9/30/20 book value, and
commercial lines peers at 12x 2021E earnings and 1.2x 9/30/20 book value.
Meanwhile, specialty SMID peers trade close to 25x 2021E earnings and 3.0x
9/30/20 book value.

Risks to Rating and Price Target

In our view, TIG could outperform our price target if:

 The company is able to add distribution partners. Our premium projections

for TIG do not incorporate many major new Program Partners beyond the 27 that
it has currently. If management is able to source more program partners over
time, there could be upside to our growth estimates. In addition, our premium
forecasts would need to be revised higher if TIG decides to raise its retention rate
beyond our assumption of 40% in 2022.
 Pricing trends in the workers’ compensation market improve. State
regulators have been forcing insurers to reduce workers’ compensation premium

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rates for the past several years, and we foresee continued pressure. However, the
pace of decline could slow if state regulators respond to a potential uptick in
claims due to COVID-19 and/or unfavorable economic conditions. This, in turn,
would bode well for premiums and margins in the line.
 The company is able to garner market share in new product lines. Our
premium projections assume a relatively modest contribution from TIG’s
expansion in product lines other than workers’ compensation in the near term. If
management is successful in expanding the company’s presence in the
commercial auto, homeowners’, or auto physical damage lines while maintaining
its overall margins, revenues and earnings could exceed our projections.
Conversely, we believe that TIG could underperform our price target if:

 The economy suffers a prolonged recession. TIG’s business mix has been fairly
insulated from the negative impact of the economic slowdown thus far, but a
prolonged recession could eventually hurt payroll and employment in the sectors
it is most exposed to (construction, agriculture, and healthcare). Besides
suppressing top-line growth, a weak economy could also drive an uptick in
claims costs and slow the pace of favorable reserve development, a key driver of
robust margins in recent years. Furthermore, given Trean’s focus on small
business accounts, we believe that the company’s customer base will be
especially vulnerable to weakness in the post COVID-19 environment.
 Pricing conditions in the workers’ comp. market continue to deteriorate. WC
is one of the few lines in the broader commercial P&C insurance business that is
not experiencing firming pricing. Unlike in most lines, pricing in workers’ comp.
is highly regulated and regulators have been pushing insurers to cut prices for the
past few years due to robust margins. Continued declines in prices could pressure
margins and drive reductions in EPS projections, especially if this is accompanied
by a slowdown in the pace of favorable reserve development.
 State rules on presumption of coverage expand. We do not expect state orders
on presumption of coverage that are currently in place to have a material impact
on TIG’s claims. Still, depending on how COVID-19 cases trend and the
regulatory environment, there is a risk that states extend or expand coverage,
which would hurt the company’ margins and earnings.
 Potential secondary offerings by key investors. Following the IPO, Altaris
owns 55% of TIG and Blake Enterprises owns roughly 10%. In our view, both
will eventually dispose of their entire stake in Trean over the next few years.
Both are subject to a 180-day lockup expiring in mid-January 2021. While
unlikely, hasty sales could limit upside in TIG’s valuation multiple, especially
given the stock’s low liquidity.

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Coverage Universe: Bhullar, Jimmy S: AFLAC, Inc. (AFL), Allstate (ALL), American International Group (AIG), Aon (AON), Arch
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Group (PFG), Progressive (PGR), Prudential Financial (PRU), Reinsurance Group of America (RGA), RenaissanceRe (RNR), Travelers
Cos (TRV), Trean Insurance Group (TIG), Unum Group (UNM), Voya Financial, Inc. (VOYA)

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