BMO Capital Markets upgraded Hanover Insurance Group (NYSE:THG) to Outperform as analyst Michael Zaremski believes that too much bad news has been priced into the P&C insurer's stock.
In the past six months, THG has dropped 23% compared with Progressive (PGR) declining 8.0%, Allstate (ALL) falling 15%, and SPDR S&P 500 ETF (SPY) climbing 12%. THG's slump came after a disappointing string of quarterly earnings, which suffered from bad weather in Michigan, where the company has a heavy concentration.
Zaremski expects that Hanover's (THG) profitability in Michigan will improve if the company takes some corrective action. He estimates that the weather events in Michigan have been an anomaly. After return on equity fell to 7% in 2022 and is estimated to be 4% in 2023, BMO sees ROE reverting closer to ~13%.
"THG is likely to follow the playbook peers have taken in the past after experiencing poor weather results, which includes raising deductibles and offering more 'depreciated value' roof-replacement coverages (vs. full replacement cost), the analyst wrote in a note to clients.
While it's likely to reduce its number of customers, "investors may not notice due to increasing pricing power," he said. As such, overall top-line growth isn't expected to slow.
Zeremski's Outperform rating contrasts with the SA Quant rating of Hold and aligns with the average Wall Street rating of Buy.
Hanover Insurance (THG) stock gained 0.9% in Thursday afternoon trading.
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