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W.R. Berkley Declines 17% YTD: What's Hurting the Stock?

Zacks Equity Research
·4 mins read

W. R. Berkley Corporation WRB has been adversely impacted by escalating costs, which, in turn, have put pressure on margins. Being a property and casualty (P&C) insurer, exposure to catastrophe losses also pose threat to the company’s underwriting income.

Shares of this Zacks Rank #4 (Sell) P&C insurer have lost 17.2% on a year-to-date basis compared with the S&P 500’s decline of 2.8% and industry’s fall of 21%.

The company reported negative earnings surprise of 2.82% in the last reported quarter. The Zacks Consensus Estimate for 2020 earnings per share is pegged at $2.56, indicating a decline of 15.5% from the year-ago reported figure.

Factors Affecting W.R. Berkley

The P&C insurer continues to suffer from increased costs, primarily owing to higher losses and loss expenses, and expenses from non-insurance businesses. High catastrophe losses have resulted in increased losses and loss expenses. High expenses from non-insurance business were mainly due to purchase of a business textile in the fourth-quarter 2019 and progress made in promotional merchandise businesses. Such costs tend to put pressure on the company’s margin expansion. In first-quarter 2020, net margin contracted 220 basis points (bps) sequentially and 210 bps year over year.

The company estimates volatility surrounding the COVID pandemic to negatively affect 2020 expected expense ratio of 31% to 32%.

Being a P&C insurer, W.R. Berkley remains exposed to catastrophe losses, which in turn impact underwriting results. Catastrophe loss soared 594.2% year over year in first-quarter 2020. The losses included an approximate $65 million preliminary provision for COVID-19 related claims activity. The company’s underwriting results were also primarily dented by the pandemic, which in turn resulted in deterioration in the combined ratio in the first quarter.

Furthermore, the company’s long-term debt hasincreased marginally in first-quarter 2020. As of Mar 31, 2020, its total debt to capital of 32.2% was higher than the industry’s 30%. The P&C insurer’s interest coverage ratio of 5.1 compares unfavorably with the industry’s 6.6, which implies that its earnings are not sufficient to cover interest obligations. Hence, the company’s solvency position remains a concern.

Additionally, W.R. Berkley’s trailing 12-month return on equity of 10% is lower than the prior quarter’s figure of 10.7%. This highlights the company’s inability to utilize shareholders’ funds.

Notably, the Zacks Consensus Estimate for current-year earnings has been revised downward by 1.2% over the past 30 days.

We believe that such potential headwinds are likely to hurtgrowth prospects going forward.

Stocks to Consider

Some better-ranked stocks in the insurance space include Fidelity National Financial, Inc. FNF, EverQuote, Inc. EVER and Kemper Corporation KMPR. While Fidelity National sports a Zacks Rank #1 (Strong Buy), EverQuote and Kemper carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National is a leading provider of title insurance, specialty insurance and claims management services.It beat estimates in each of the trailing four quarters, with the average surprise being 21.13%.

EverQuote provides online marketplace for insurance shopping, primarily in the United States. It beat estimates in each of the trailing four quarters, with the average positive surprise being 86.67%.

Kemper specializes in property and casualty insurance, life and health insurance products for individuals, families, and small businesses. It beat estimates in each of the trailing four quarters, the average positive surprise being 16.25%.

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This young company’s gigantic growth was hidden by low-volume trading, then cut short by the coronavirus. But its digital products stand out in a region where the internet economy has tripled since 2015 and looks to triple again by 2025.

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W.R. Berkley Corporation (WRB) : Free Stock Analysis Report
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EverQuote, Inc. (EVER) : Free Stock Analysis Report
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