We are maintaining our ‘Neutral’ recommendation on the shares of W.R. Berkley Corporation (WRB). Though the company is expected to perform favorably over the longer term it is expected to see a depressed fourth quarter earnings due to the impact of hurricane Sandy.
Berkley has maintained the trend of premium growth since the past several quarters, mainly due to start-up units. The company started several new units since 2006 (when the soft market cycle commenced) to position itself for taking advantage of the eventual market turn. The company is also witnessing rate increases.
With new units continuing to grow and established businesses no longer losing volume (retention rate was 80% for the last six successive quarters), overall growth is visible. We expect price rise to accelerate going forward as the new start-ups go into full swing coupled with rate improvement.
Berkley’s International unit is also showing impressive growth, which is surpassing the growth of other segments. Premium growth in the international unit is mainly from the emerging markets of Asia, South America, and the Nordic region of Europe. We expect the company’s international segment to post increasing premium in the future.
Berkley’s dividend track record also remains commendable. Moreover, the company maintains a solid balance sheet with sufficient liquidity.
However, rising loss costs, low interest environment, and an increase in combined ratio are some of the negatives.
We remain concerned over the rising loss costs and believe that the loss claims may accelerate over time. An increase in claim cost will offset the premium rate improvement seen lately, thereby pressuring the underwriting margins.
Further, the low interest rate environment, expected to continue through 2013, will pressure investment income as funds get reinvested at lower yields.
Also, Berkley’s combined ratio has increased over the past five years, indicating that claims payments and expenses grew faster than revenue from writing new premiums. We anticipate a moderate increase in 2012, mainly because of the lower base (written premium is expected to be modest), coupled with high catastrophe losses.
Berkley retains a Zacks #3 Rank, which translates into a short-term Hold rating. It competes closely with a host of property and casualty carriers, such as The Chubb Corp. (CB), The Travelers Companies (TRV), XL Group plc (XL) and The Allstate Corp. (ALL).
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