Safeco Target Re-Set Lower
Safeco's (SAF) core 4Q07 results of $1.51 per share were a penny above our expectation. Results reflected better-than-expected growth in the Property and Surety segments, which was partially offset by higher claims in its auto segment and increase in total catastrophe losses.
Although the company has implemented cost savings initiatives and programs to boost sales and underwriting profitability -- including a market segmentation system -- strong competition in certain markets and products (especially in the auto segment) continues to pressure the company's premium and earnings growth. This trend is expected to continue during 2008.
At current levels, the stock trades at 1.22 times its 4Q07 book value of $37.81 per share, pretty much in line with its peer median. However, these valuations may be a tad over-extended at a time when the market is slowing and ROE [return on equity] is declining in our view. Our six-month price target of $50.00 per share (down from $63.00 per share previously), incorporates a peer median multiple of 1.25 times (down from 1.55 times) to our estimated book value (at June 30, 2008) of $40.00 per share.