Morningstar | W.R. Berkley Posts Good 1Q Results
W.R. Berkley had a solid start to the year. The company posted an annualized ROE of 13.3% in large part due to expense control, and management’s comments suggest the operating environment might be set to improve. However, nothing in the quarter alters our long-term view, and we will maintain our $49 fair value estimate.Results in the insurance segment were stable, with the combined ratio ticking up slightly to 94.0% from 93.8%. The loss ratio crept up in part due to noncatastrophe weather losses, but we are not overly concerned with modest quarter-to-quarter gyrations on this front. On the other hand, we are pleased to see the expense ratio fall to 31.8% from 32.9% last year. W.R. Berkley has been in a bit of an investment phase in recent years as it built out new lines. As a result, we believe there are opportunities for the expense ratio to come down, and we are encouraged that this might be starting to flow through. Additionally, management noted that, excepting workers compensation, average rate increases were 6%. This mirrors comments from Travelers, and suggests the pricing environment is starting to improve. If the company can lower its expense ratio at the same time, W.R. Berkley could see a meaningful improvement in underwriting results. However, year-over-year net written premium growth of only 2% suggests management still sees a somewhat limited opportunity set.
After a few years of retrenchment in reinsurance due to a weak pricing environment, it appears that management may be open to growth, as net written premiums in the reinsurance segment were up 10% year over year. The company’s combined ratio in this segment came down to a reasonable 96.8% in the quarter, compared with 101.3% last year. We will watch this trend as we believe overcapacity in reinsurance is structural, given the rise of catastrophe bonds. Still, management’s track record of underwriting discipline inspires confidence that it will approach this situation responsibly.
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.
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