UPDATE: Compass Point Downgrades Meadowbrook Insurance Group to Neutral, Reiterates $8 PT Following Recent Share Price Rise

In a report published Thursday, Compass Point analyst Ken Billingsley downgraded the rating on Meadowbrook Insurance Group MIG from Buy to Neutral, but reiterated the $8.00 price target. In the report, Compass Point noted, “MIG reported another reserve charge this quarter, but this one was contained within earnings and book value and more importantly statutory capital grew QoQ. While the company has been evaluating strategic alternatives since 2012, we believe the company is not inclined to sell at valuations below 90% of book value. We estimate that at the lower end of management's guidance this translates into a 5.7% ROAE for 2014. However, for every 1% improvement in the combined ratio, this adds nearly 1.1% to the ROAE. We believe management is attempting to be conservative regarding the guidance for 2014, but even with a 2% improvement in the combined ratio the ROAE would be approximately 8.3%, which we believes would translate into a P/B multiple of approximately 0.8x – to 0.9x. This translates to a 12 month price target of approximately $8 based on our 2014E BVPS of $9.01. If the company was eager to sell we could rationalize valuations near $9 per share, but we don't believe buyers would be willing to pay a premium to BVPS at this time. We are downgrading MIG to Neutral given the recent rise in its share price following 3Q13 earnings and maintain our $8 price target.” Meadowbrook Insurance Group closed on Wednesday at $7.30.