Sentiment dampens P&C stock performance despite strong fundamentals The Factset P/C Index was modestly positive in the first quarter (+3.4%), but underperformed the S&P 500 (5.8%) and financials (+15.4%) as rising interest rates hurt sentiment towards the group. Within P&C insurance, commercial lines insurers were the best performing (+9.9%) on the heels of the "hard" pricing environment and upward estimate revisions following 4Q20 results. Personal lines (+1.7%) underperformed on fears of underwriting margin compression given the competitive pricing environment and rising claims frequency as miles driven increases. Insurance brokers also underperformed (+3.8%) as investors moved to more interest rate sensitive stocks.

Margin expansion potential in FY '21 driven by "hard" market is currently underappreciated by the street We continue to prefer commercial lines insurers into 1Q21 results. In addition to favorable pricing commentary, we expect 1Q21 commercial insurance loss picks for most companies to be better than consensus, driving upward consensus earnings estimate revisions (similar to 4Q20). For reinsurers, catastrophe losses could be worse than expected and while commentary on mid year pricing outlook will likely be consistent with 1/1/2021 renewals, given new capital entering the market, pricing could be weaker than expected. Personal lines insurers will continue to benefit from lower personal auto claims frequency as miles driven remain below pre- COVID levels. That said, there remains significant competition and severity will likely remain elevated which could result in disappointing personal auto margins. For brokers, we expect organic growth to improve modestly, albeit still with some headwinds from lower discretionary spend, while margins continue to expand y/y.

Adjustments for the quarter: reflects the CAT losses associated with Winter Storm Uri We lowered 1Q21 EPS estimates for 10 companies and left 10 unchanged. The majority of estimate revisions for commercial lines and reinsurance relate to losses from Winter Storm Uri which is likely to cause above-average catastrophe losses this quarter. We have also adjusted estimates to reflect better expected performance for alternative investments for companies that have exposure to this asset class.

We like WRB and CB into 1Q21 results on better than expected underlying margin expansion We see WRB expanding underlying underwriting margins by 220 bps y/y and premium growth accelerating to +10% y/y. We estimate CB will also improve underlying underwriting margins in its NA Commercial business by 220 bps with premium growth accelerating to +11% y/y. We believe this will lead to upward consensus EPS estimate revisions for both of these companies.