Alleghany vs. W.R. Berkley: Which is a Wealthier Stock?

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The insurance industry has been able to display impressive results in the first half of 2018, thus cementing investors' confidence for better performance in the upcoming quarters. The insurers were able to experience noticeable bottom-line growth while witnessing a substantial improvement in the top line and we expect this momentum to continue given the improving economy, rising interest rates, lower tax incidence and a comparatively lower catastrophe loss.

With respect to interest rates, the slow and steady progress in the same has been a boon for insurers with the Fed indicating two more rate hikes this year, lending an impression of aggressive rate increases. Hence, an improving rate environment will aid investment income, an important component of insurers' revenues.

The Fed's minutes released on Aug 22, 2018 instilled hopes among investors as the Fed officials remain on track to augment rates at their September meeting. The officials kept the interest rate unchanged (1.75-2%) while hinting at more probable rate raises in the future meetings.

This apart, inflation has finally reached the Fed's 2% target after unable to achieve the same for the past six years. Further, the unemployment rate came in at 3.9% with the gross domestic product (GDP) estimated to grow 2.8% for 2018 before averaging at 2.4% in 2019. The Central Bank also increased its third-quarter 2018 GDP estimate to 5% (from the previously guided 4.7%). Besides this, a recovering housing market looks geared up to enhance insurable exposures and premiums written.

Focusing on other factors, the insurers are well-positioned to benefit from a broader invested asset base and alternative asset classes. Mergers and acquisition activity, already an important trend to look out for in the current year, is expected to add more fuel to the already upbeat performance of the insurance industry.

With the insurance industry exhibiting a favorable underwriting performance and improving combined ratios, we can expect this bullish sentiment to continue in the near term in comparison to the tumultuous journey in 2017.

A sturdy financial position, attributable to continued capital inflow into the industry, will not only back insurers to counter a near-term instability as well as the impact of any unfavorable occurrences but will also keep the industry's growth trend active.

The Property and Casualty Insurance industry is ranked at #109 (among top 43% of the Zacks Industry Rank for 255 industries) in spite of underperforming the S&P 500 index's growth of 7.3% year to date, up 5%.


The price to book value metric is the best multiple used for valuing insurers. Compared with the Property and Casualty Industry's P/B ratio of 1.44, W.R. Berkley is overvalued with a reading of 1.72. Meanwhile, Alleghany is much cheaper with a trailing 12-month P/B multiple of 1.14. Thus, this round goes to Alleghany as its shares are underpriced than that of W.R. Berkley.

Return on Equity

W.R. Berkley's return on equity of 7.25% lies above the industry's average of 5.85% as well as Alleghany's 3.51%. Return on equity, a profitability measure, reflects how efficiently the company utilizes shareholders' funds. Therefore, between W.R. Berkley and Alleghany, the latter is comparatively better-positioned.


While W.R. Berkley's debt-to-equity is higher than the industry average of 26.9%, Alleghany scores lower in this regard. Hence, Alleghany with a leverage ratio of 18.7% has a visible edge over W.R. Berkley's 49.4% ratio.

Dividend Yield

With no competition from Alleghany (as the company does not pay out any dividends), W.R. Berkley's dividend yield of 0.78% in a year exceeds the industry's 0.47% average. Hence, W.R. Berkley is the clear winner in this regard.

Combined Ratio

Combined ratio, the percentage of premiums paid out as claims and expenses, determines the underwriting profitability of an insurer.

Alleghany's combined ratio was 90.7% in the first half of 2018 while W.R. Berkley's came in at 94.8%. Therefore, Alleghany wins this round, hands down.

Earnings Surprise History

As far as both companies' surprise history goes, Alleghany surpassed the Zacks Consensus Estimate in three of the last four quarters with an average beat of 17.61% while W.R. Berkley delivered a positive surprise in all the trailing four quarters with an average positive earnings surprise of 11.82%.

Hence, Alleghany outshines W.R. Berkley in this round.

Earnings Estimate Revisions and Growth Projections

Alleghany's 2018 estimates have moved 3.5% north and 4.3% up for 2019 over the past 60 days. Meanwhile, the Zacks Consensus Estimate for W.R. Berkley's current-year earnings has been revised 3.3% upward while the same for 2019 bottom line has been revised 0.5% downward.

For Alleghany, the consensus mark for 2018 earnings per share is estimated to skyrocket 1762.8% and for 2019, the company's earnings are expected to decrease 3.3%.

For W.R. Berkley, the consensus estimate for earnings per share in the current year is projected to surge by 52.4% while for 2019, the bottom line is predicted to dip 0.1%.

In this case, Alleghany gains advantage over W.R. Berkley.

To Conclude

Alleghany is better placed than W.R. Berkley on the basis of a bullish rank, strong return on equity, valuation, leverage ratio, combined ratio as well as better earnings surprise history and encouraging earnings estimate revisions plus growth projections. While taking parameters like a better price performance and an impressive dividend yield into account, W.R. Berkley seems a healthier choice than Alleghany as a stock. Per our comparative analysis, Alleghany thus seems a more rewarding investment pick than W.R. Berkley.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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