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W.R. Berkley (WRB) Rides on Premium Growth, Suffers Cat Loss

Zacks Equity Research
J.Jill (JILL) delivered earnings and revenue surprises of 4.35% and 0.65%, respectively, for the quarter ended July 2018. Do the numbers hold clues to what lies ahead for the stock?

W.R. Berkley Corporation WRB is poised for growth given its array of insurance services, growing contribution from international business, improving rate environment, rate increases and reserving discipline.

Banking on sustained operational performance and a strong financial position, the property and casualty (P&C) insurer has been investing in new start-up units, which have resulted in continued premium growth over a considerable period of time. In fact, the insurer has been making efforts in establishing new units to strengthen geographical footprint as well as tapping into new and exciting market opportunities. Notably, W.R. Berkley expects premium volume to increase at a modest pace from the beginning of 2018.

This apart, the company’s international business has significantly contributed to improvement in premiums and we expect this particular business to report increasing premiums in the near term.

Investment income, an important part of the company’s economic model, has displayed a noticeable improvement in the last couple of years, owing to the rising interest rate environment. With the Fed indicating a possibility of raising the same thrice in 2018 and twice in 2019, better investment results are anticipated in the near term.

Additionally, the P&C insurer has been witnessing favorable reserve development over a considerable period of time, thus exhibiting excellent reserving discipline.

Moreover, W.R. Berkley’s robust capital position instills confidence and raises optimism among investors with respect to the future growth and an overall financial health of the company. Effective capital deployment, including dividend raises, special dividends and share repurchases, makes it an attractive pick for yield-seeking investors.

However, as a P&C insurer, W.R. Berkley’s exposure to catastrophe loss has not only impacted the insurer’s underwriting profitability but has also left an adverse effect on its combined ratio. The year 2017 turned out to be costliest in terms of catastrophe loss due to string of unprecedented cat occurrences. Given the unpredictable nature of such calamities, underwriting results are subject to volatility.

Further, the company has been incurring escalating expenses over the last few years and we do not expect a turnaround any time soon. This has also been restricting the operating margin expansion, hampering the company’s overall results and limiting its growth. Therefore, the company should strive to generate a higher revenue growth rate than the rise in expenses.

Stocks that Warrant a Look

Investors interested in stocks worth considering from the insurance industry may look at Radian Group Inc. RDN, Alleghany Corporation Y and American Financial Group, Inc. AFG.

Radian Group offers mortgage and real estate products and services in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 7.87%.

Alleghany Corporation provides property and casualty reinsurance and insurance products in the United States and internationally. The company came up with positive surprises in two of the last four quarters with an average beat of 2.91%.   

American Financial provides property and casualty insurance products in the United States. The company pulled off positive surprises in all the last four quarters with an average beat of 26.31%.

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