We are maintaining a Neutral recommendation on the shares of
W.R. Berkley Corporation ( WRB ).
Though the company's second-quarter earnings exceeded the Zacks
Consensus Estimates, we remain concerned by the competitive market
environment and the ongoing soft insurance pricing.
Berkley has maintained the trend of premium growth since the
past several quarters, mainly due to start-up units. Berkley
started several new units since 2006 (when the soft market cycle
started) to position itself to take 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 five successive
quarters), overall growth is visible. We expect price rise to gain
pace 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
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
We also 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, thus
pressurizing 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
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. (
The Travelers Companies ( TRV ),
XL Group plc ( XL ) and
The Allstate Corp. ( ALL
ALLSTATE CORP (ALL): Free Stock Analysis Report
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