Volume 31, Number 3, March 2020

Companies

AIG: Transformation Should Gain Further Traction in 2020

AIG reported an in-line quarter, with operating EPS of $1.03 versus consensus of $1.00. The highlight was continued improvements in the North America commercial book as re-underwriting actions take hold. Premiums have stabilized, losses are coming down, and favorable development has started to emerge. In addition, the company provided details of its multiyear program to overhaul infrastructure and underwriting operations, which should reduce expense further over time. These factors should bring the combined ratio to the mid-90s in 2020, a level not seen in a while. However, low interest rates are a significant headwind to this progress and should mute earnings growth in the near term. (William Blair & Co)

Chubb Announces New Streamlined Process for Requesting Certificates of Insurance

New functionality enables faster retrieval and distribution of time-sensitive documents

Chubb announced enhancements to its proprietary Worldview® platform, providing brokers and insureds with a streamlined process for efficiently managing all of their multinational insurance needs in an increasingly fast-paced global business environment. Through these new capabilities within Chubb’s Worldview® platform, customers can now submit certificate requests online and receive same day turnaround for select countries and products.

Chubb Limited (CB): Top-Line Momentum Picking Up, but Margin Pressures Still Likely in 2020

Chubb had another stable quarter, with operating EPS of $2.28 versus the consensus of $2.12 and our estimate of $2.06. Top-line growth is accelerating as rate increases pick up in response to the worsening tort environment. However, the commercial business continues to show moderate deterioration on both the loss and development front. We expect these trends to continue in 2020 as escalating social inflation should continue to put pressure on losses and reserves. We would likely need to see rate increases at current levels for at least the next year before we would expect to see any meaningful margin expansion. These margins pressures should keep EPS growth in the mid-single digits next year. Despite this, the stock is trading at the high end of its historical range at 14 times our 2021 EPS estimate, which suggests risks are more to the downside. (William Blair & Co)

CNA: Earnings Growth to Remain Challenged in 2020

CNA had a good quarter with operating EPS of $0.97 ($1.15 excluding an asbestos charge) versus consensus of $0.89 and our estimate of $0.83. The beat was largely driven by alternative returns given strong equity markets. The highlights were accelerating rate momentum and continued expense discipline. However, social inflation continues to weigh on results similar to the rest of the industry, a theme we have highlighted since late 2016. We expect further loss deterioration next year, and investment income is likely to be constrained given the drop in interest rates. This should result in a lack of earnings momentum for 2020, when adjusting for one-time charges in 2019. However, a combined ratio in the mid-90s should allow it to continue returning excess capital to shareholders. With a dividend yield of 7%, the stock remains a strong defensive play. (William Blair & Co)

Lemonade expands into pet insurance

Artificial intelligence-powered insurtech company Lemonade, which offers homeowners and renters insurance products in the US and Europe, has announced its plans to expand into pet insurance.

RBS to change name

Royal Bank of Scotland (RBS) says it is to change its name to NatWest Group later this year as it commits to a new future following the taxpayer bailout of 2008. (Sky News, Feb 14). The new chief executive of RBS, Alison Rose, tells Ian King about the decision to rename the group NatWest. My suspicion is that the name change is more to do with UK unity than with an escape from the past. With the UK now having exited the EU and Scotland once again bellowing for independence, the name change removes ‘Scotland’ from its’ prior prominence. Watch Ms Rose deliver this news HERE (secure). 

People

Leading cultural transformation experts join Lloyd’s Culture Advisory Group

The Group has been set up as part of a comprehensive action plan to drive long-term culture change in the Lloyd’s market. Membership of Lloyd’s Culture Advisory Group:

• John Amaechi, Chief Executive Officer, APS Ltd
• Sheila Cameron, Chief Executive Officer, Lloyd’s Market Association
• Dominic Christian, Global Chairman of reinsurance solutions, Aon, Chair, Inclusion@Lloyd’s
• Christopher Croft, Chief Executive Officer, London and International Brokers’ Association
• Brian Dow, Chief Executive Officer, Mental Health UK, Deputy Chief Executive Officer, Rethink Mental Illness
• Dame Jayne-Anne Gadhia, CEO of Salesforce UKI
• Clare Lebecq, Chief Executive Officer, London Market Group
• Fiona Luck, Lloyd’s board member and non-executive director for talent and culture (Chair)
• Dave Matcham, Chief Executive Officer, International Underwriting Association
• Pauline Miller, Head of Talent Development and Inclusion, Lloyd’s (Secretary)
• Debbie Ramsay, Director, GoodCorporation
• Jo Scott, Chief Marketing and Communications Officer, Lloyd’s
• Amanda Thompson, Culture Programme Manager, Lloyd’s
• Julia Tyson, Chief Human Resources Officer, Lloyd’s

Tokio Marine Kiln expands Special Risks division

Tokio Marine Kiln (TMK), the leading international specialist underwriting business, has appointed Charlotte Pritchard as an underwriter within its Special Risks team. Pritchard will focus on all aspects of special risks, including political violence and accelerating the growth of TMK’s terrorism book. She will report to TMK’s Divisional Head of Special Risks, Edward Parker. Pritchard has worked in the London market for 13 years and has a proven track record of success in her field. Most recently she was an underwriter at Barbican Insurance Group, where she had worked since 2017 specialising in malicious acts including terrorism and political violence. Prior to this, Pritchard was at Canopius for 11 years where she focused on a broad range of special risks including political risk, trade credit, terrorism and political violence.

Agent & Broker News

Aon acquires Cytelligence

Acquisition combines Aon's industry-leading investment in cyber security with Cytelligence's unique technical expertise in incident response and digital forensics services to strengthen Aon's cyber security client value proposition.

Aon increased its profit by 35% in 2019. The broker enjoyed a big leap in its profits in 2019 and some revenue growth. Its performance was particularly strong in the fourth quarter, in part boosted by strong organic growth and some savings from a restructuring process.

Aon plc (AON): Strong Momentum Increases Our Conviction for 2020

Aon had a strong finish to 2019, with upside on the top and bottom lines. Organic growth accelerated to roughly 7% in the fourth quarter, yielding 6% for 2019. Notably, average organic growth for P&C brokerage businesses (i.e., commercial risk, reinsurance, and data and analytics), which are 68% of revenue, rose 10% in the fourth quarter and 7% for the year. For the year, adjusted operating margin improved 240 basis points (inclusive of 150 basis points of organic savings). We believe Aon has a great outlook over the next couple of years. Favorable market impacts and continued execution offer the potential to drive 6%-plus organic growth, which combined with additional cost savings should drive 100-plus basis points of margin improvement. Lastly, with free cash beginning to see a material step up given declining structural outlays, the company will have greater capacity to allocate capital toward accretive deals or repurchases. We expect the company should be able to grow cash EPS at an above-average mid-teens pace over the next couple of years. We reiterate our Outperform rating. (William Blair & Co)

Aon Center observatory will begin construction this year and open in 2022

Chicago’s long-discussed third observation deck is ready to start taking shape

It’s been more than a year since city officials approved a new observation deck and a 1,185-foot exterior elevator for Chicago’s Aon Center, and the sky-high attraction is finally getting ready to move forward.

Although construction was initially expected to start in the spring of 2019 and finish by 2021, the addition is now set to begin work in the third quarter of this year and wrap up in 2022, according to a recent Chicago Tribune report. Read more HERE and see an artist rendering

Aon Q4 revenue increases 4%

Aon PLC reported Q4 2019 revenue of $2.9 billion on January 31, a 4 percent increase from Q4 of 2018, driven by 7 percent organic revenue growth, as its reinsurance business soared due to strong growth in catastrophe bonds and capital markets transactions. 

Arthur J. Gallagher & Co. (AJG): Earnings Should Accelerate in 2020

Gallagher had a strong finish to 2019. Operating EPS of $0.66, up 25%, beat our estimate of $0.62. Upside was driven by accelerating organic growth and a better-than-expected clean energy tax credit. The outlook for 2020 appears incrementally positive for Gallagher. Rising rates and a strong economy should bolster organic growth to at least 6%, which should support higher levels of margin improvement. With increasing scale, we expect Gallagher will get leverage on deal-related costs (i.e., amortization), resulting in accelerating operating EPS growth to low- to mid-teens over the next couple of years. At 17.5 times our 2020 cash EPS estimate, Gallagher trades at a 14% discount to peers, despite above-average organic growth prospects, consistent execution in its tuck-in deal strategy, and a good likelihood of steady margin improvement over the next couple of years. We reiterate our Outperform rating. (William Blair & Co)

Marsh & McLennan Companies, Inc. (MMC): Subpar Organic Growth Going Into 2020

While results were generally in line, organic growth was weak given a strengthening environment. Organic appears unlikely to meaningfully accelerate over 4%, margin will continue to be pressured by JLT, and free cash available for repurchases/deals will be limited given a focus on deleveraging. As a result, we estimate 2020 operating EPS growth of 10%. Although the company increased potential costs savings, 2020 pretax margins will likely remain below pre-JLT levels. While the stock remains a solid holding over the long term, we favor brokers that have a better chance of achieving low- to mid-teens EPS growth over the next couple of years. Our rating is Market Perform. (William Blair & Co)

QuinStreet, Inc. (QNST): Insurance Growth Picking Up

Improving insurance growth and better-than-expected financial services revenue drove top-line upside. However, worse-than-expected margins (due to absorbing fixed costs associated with acquisitions completed last year) resulted in a $0.02 miss to our EPS estimate of $0.14. Still, in our view, the improving top-line momentum is the main takeaway and should help reassure investors after inconsistent performance in the second half of last year. The QuinStreet Rating Platform (QRP) software for independent insurance agents should launch at 6 agencies later this year, representing $10 million in annual revenue. With another 6 agencies in “advanced stages” of the sale pipeline, QRP could add roughly $20 million to revenue and $15 million to EBITDA (30% growth) in fiscal 2021. Lastly, management is making good progress on the strategic review and has begun to divest underperforming verticals. While we don’t anticipate a deal until at least the middle of this year, we believe a streamlined vertical focus will be an attractive target to strategic buyers (we estimate a low to mid-$20 per share take-out price). Even in the absence of a deal, QuinStreet remains attractive at roughly 13 times fiscal 2020 EV/EBITDA (two-year average is roughly 16 times. (William Blair & Co)

People

Facultative reinsurance specialist joins Miller to service and support major cedants globally

Michael Lazarus has joined Miller’s Facultative Reinsurance team to support its clients globally. Michael specialises in the energy and heavy industry sectors, including mining and power. He has considerable experience in a number of geographic territories including Asia, USA, Canada, Australia, New Zealand, UK, Israel, South Africa and Continental Europe. Michael will also support Miller’s placement teams with his broad knowledge and understanding of global markets. Michael began his career in 1993. He has worked in London, Australia, USA, Hong Kong, Singapore and South Africa and joins Miller from Aon London.