Morningstar | W.R. Berkley Ekes out Some Underwriting Improvement in 3Q
Overall, we think W.R. Berkley turned in a solid but not especially remarkable third quarter. Annualized return on equity was 12%, roughly in line with recent results, and underwriting results improved modestly. We will maintain our $71 fair value estimate and narrow moat rating.In primary lines, net written premiums were up 5% year over year. Management’s comments suggest they see a somewhat mixed pricing environment, and are picking their spots, with the strongest growth coming from short-tail lines such as commercial multi-peril and commercial auto. We think management’s track record of underwriting discipline inspires confidence that they will navigate the current environment appropriately.
W.R. Berkley did see some modest improvement in underwriting results in primary lines, with the combined ratio falling to 94.9% from 95.6% last year. This improvement was primarily driven by a lower expense ratio, as modest growth allowed for some cost leverage. Going forward, we think the company should have opportunities to make gains in the expense ratio as its international and more nascent operations start to scale. But in the near term, the direction of the pricing cycle will likely drive results on this front.
The picture in reinsurance remains bleak, but we think the company has taken the right actions in response. Net written premiums were down 14% year over year, with this decline concentrated in property lines. Management expressed disappointment in the pricing response to the flurry of catastrophes last year, and, given this, we see further re-entrenchment as the right move. In our view, the oversupply of capital in reinsurance lines is a structural issue, and a return to adequate pricing is unlikely to occur anytime soon.
Underwriting results in reinsurance did improve, but remain unattractive, in our view, with a combined ratio of 107.9% for the quarter. However, we would note that the advantages of W.R. Berkley’s relative aversion to catastrophe exposure have been on display over the past year.
W. R. Berkley is an insurance holding company. The company operates in two segments of the property casualty insurance business: Insurance, which includes commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia; and Reinsurance, which provides reinsurance business on a facultative and treaty basis, primarily in the United States, the United Kingdom, Continental Europe, Australia, the Asia-Pacific region and South Africa.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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