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Wednesday, Oct 23
Sandler cuts Travelers to Hold
- "Sell on the sunshine and buy on the storm," says Sandler O'Neill, removing its Buy rating on Travelers (TRV -0.5%). Q3 results beat expectations, the company is flush with cash, the buyback was boosted, and price increases for most businesses should assure improved profit margins in 2014. So what's not to like?
- Commercial insurance pricing is starting to falter, says Sandler. Middle market commercial business prices are now rising at about a 7.1% pace vs. 7.8% a year ago. Quibbling over crumbs? Maybe, this particular segment is a key leg of the bull thesis.
- Travelers is also emerging as a leader in lowering auto insurance rates, says Sandler, noting the company anticipates price declines of up to 10% in some accounts.
- ROE in 2014 is expected to decline to 10.6% from 12.7% in 2013 - a reflection of the "lucky weather" this year.
- Finally, there's valuation, not just for TRV, but for the entire sector. "We think it is increasingly hard to justify higher price-to-book value multiples for Travelers and the group in an environment where the hard market appears to be slowing down."
- The Sandler price target of $95 is 1.2x next year's expected book value per share.