We expect fundamentals in the P&C business to be healthy, but our view of stocks is more muted. The lag effect of improved pricing, benign losses, and easy comps should boost top-line growth and margins for underwriters and brokers in the near term. However, mixed pricing trends, rising inflation, and the recovery in valuation multiples keep us from being overly bullish. Given these factors, we see better opportunity in stocks with company-specific catalysts than broad industry themes. ALL is our top pick and we are cautious on RNR.

 Increasing 2Q21 forecasts. We are raising our 2Q estimates for most insurers to reflect higher than previously assumed alternative investment income and lower cat losses. Our 2Q21 projections for most insurers are above consensus.

We believe that street projections for AIG, RNR, and TRV are too low, while numbers for ALL seem high. Meanwhile, our 2022 estimates for most firms are below consensus, and street projections for RNR seem especially optimistic.

 We expect business trends to be relatively strong. Our models project brokers to report strong margins and double-digit organic growth, driven by the economic recovery and easy comps. Margins for insurers should be healthy as well, and benefit from rising prices and benign cat losses. On a core basis (ex.

cats and PYD), margins should improve in reinsurance and commercial lines, but decline in personal lines (although they should still be strong overall).

 Pricing and loss cost trends are likely to be the key topics of focus, and commentary on these should be mixed. Our outlook for commercial lines pricing remains upbeat, mostly given greater discipline on the part of leading underwriters (. . . for now). Reinsurance rates are likely to continue to rise as well, but we expect the pace to moderate and be below investor expectations, and thereby drive reductions in premium and margin forecasts. Personal lines pricing should stay competitive in the near term, but could turn in late 2021 if loss costs continue to rise. A recovery in business activity, the opening of courts, and an uptick in inflation should heighten investor concerns about margins.

 Valuations appear full. The JPM P&C Underwriter Index is trading at 1.3x BV, above the historical average of 1.1x and up from 1.2x at the beginning of the year. On P/E, the group is at 14x forward EPS, above the historical level of 12x and up from 13x at the beginning of 2021. Brokers are trading well above historical levels as well. On a positive note, the sector is at a larger discount to the overall market than historically. Still, given mixed pricing trends and rising loss costs, we see limited room for further expansion in valuation multiples.

 ALL is our top pick, we remain negative on RNR, and we downgrade GSHD from OW to N reflecting its balanced risk-reward. An improved risk profile following the sale of the annuity and life blocks has helped ALL outperform, and we anticipate further multiple expansion with an uptick in PIF growth, which we project in late 2021. Also, we are bullish on AON and expect sentiment on the stock to improve with better clarity on the WLTW deal (regardless of whether it is approved or abandoned). On the other hand, our cautious stance on RNR reflects secular headwinds facing the reinsurance market in the long run and concerns about slowing price hikes in the short term.