Goldman Downgrades WSH, WRB, Reinitiates XL

In a report published Wednesday, Goldman Sachs analysts changed their ratings on companies in the US Insurance - Property & Casualty sector, while maintaining a Neutral coverage on the brokers. The analysts downgraded the rating on

to Sell from Neutral, while reducing the price target from $46 to $45. In the report Goldman Sachs noted, "We believe the market has priced in WSH achieving full benefits from the operational improvement program, but we expect the benefits from the program are unlikely to be linear, and in our view it remains too early in the program's roll out to assume full achievement of the financial targets." Due to limited capital, Willis Group is unlikely to be able to return incremental capital to shareholders over the next several years, beyond its scheduled dividend of 2.5 percent and buybacks, which have been planned to offset dilution from share grants. "Given its peer high financial leverage, we believe WSH's pending acquisition of Gras Savoye and our estimated lack of visible cash flow in the near term further increase risk," the analysts wrote. The analysts upgraded the rating on

to Neutral from Sell, while maintaining the price target at $51. "WRB's focus on small, whole account insurance business enables the company to obtain better rate gains on less price sensitive business. The whole account strategy is beneficial in reducing margins as accounts are less widely marketed for renewal," the report mentioned. In international markets, W. R. Berkley continues to grow insurance lines of business. Here, the pricing environment is also more favorable than in the property category. "WRB's less capital intensive, longer tail book of business allows the company more flexibility in their investment strategy. The company manages their own alternative investments as well, and has historically been opportunistic in allocating assets," the analysts said. Goldman Sachs reinitiated coverage of

with a Neutral rating and a price target of $39. The analysts commented, "Reliance on reinsurance operations given the continued market pressures causes concern for us to become more positive on the name. At the end of year-end 2013, Catlin wrote 38% of its $4.1bn of NWP in reinsurance lines. Combined with XL's current reinsurance operations, we estimate that around ~30% of premiums will come from reinsurance operations, where margins and pricing are likely to remain pressured in the foreseeable future." The acquisition does create execution risk and this could distract the company's focus away from the actions needed to retain its market position and manage a continued shift in the environment.