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Compass Point initiates coverage of P&C insurance sector

Compass Point Research & Trading LLC analyst Bijan Moazami has initiated coverage of the property and casualty insurance sector.

Allstate Corp., Aon PLC, Chubb Corp., The Hartford Financial Services Group Inc., James River Group Holdings Ltd. and Travelers Cos. Inc. all secured a "buy" rating from Moazami.

The analyst wrote that Allstate's market position is "very desirable" given the oligopolistic characteristics of the auto industry where larger insurers dominate and noted that the company is generating some of the best return on equity of the insurers he follows.

Moazami cited Aon's predictable and recurring earnings and the projection that it will continue to grow organically as inflation leads to higher insurance rates and as brokerage clients grow.

He said Chubb's portfolio approach to writing commercial insurance makes it an outperformer. He believes that the company can offer products at a higher price compared to its competitors and still win business due to its "impeccable" claims reputation.

In initiating coverage of The Hartford, Moazami took into consideration the company's "impressive" performance in commercial lines and "great" market position in the personal lines segment.

Moazami sees James River, which is essentially an excess and surplus lines company, as a "formidable" competitor due to its "hyper low" expense ratio. He also expects the company to benefit as the commercial auto business becomes a promising venture for excess and surplus writers.

On Travelers, he cited the company's "consistent" commercial lines segment strategy, "very competitive" expense ratio, "solid" growth rate production and "steady and aggressive" buybacks.

Moazami initiated coverage of American International Group Inc., Argo Group International Holdings Ltd. and Marsh & McLennan Cos. Inc. at "neutral."

He wrote that fixing AIG's return will be a "monumental" challenge. He also said that AIG turned into an overcapitalized entity with a significant expense disadvantage, and that it has to offer policies at a lower price than its competitors due to its "tarnished" claims reputation.

On Argo Group, he noted its "impressive" ex-catastrophe loss ratio in the fourth quarter of 2018. However, he is not recommending the company due to its 37% to 38% expense ratio range, writing that the company's tangible return on equity would suffer when the high expense ratio is combined with low leverage.

Moazami wrote that Marsh & McLennan's stock has good fundamentals as rising insurance prices will help organic revenue growth in the insurance risk services business and as investment management and other initiatives partially offset margin contraction of the defined benefit business. However, he said he hesitates in recommending Marsh & McLennan as he prefers Aon. He expects Marsh & McLennan's acquisition of Jardine Lloyd Thompson Group PLC will be a "monumental" challenge.

Moazami initiated coverage of RLI Corp. at "sell," writing that the company's earnings are "more volatile" compared to past earnings due to suffering from every kind of catastrophe loss. He also said almost 40% of the company's growth in the past quarters has been generated by new lines of business, which are "significantly" riskier because of its little experience in managing new risks.