Morningstar | W.R. Berkley Stands Out for Discipline and Stability
W.R. Berkley's niche focus and strict underwriting discipline result in a business model that has earned outstanding returns during hard market pricing periods, but only slightly better than adequate returns during soft periods.The pricing environment has not been particularly favorable in recent years, and management has stayed cautious as a result. While it did not escape unscathed, W.R. Berkley's aversion to catastrophe exposure was a positive over the past couple of years, as the industry was buffeted by a flurry of catastrophe events. Typically, the industry sees pricing firm following large catastrophes, and that has been the case again. However, the pricing increases that have materialized in the immediate wake of these losses were modest. As a result, the adequacy of pricing remained questionable, particularly in reinsurance lines. But in the first quarter, management commentary turned more bullish on pricing, which suggests a more advantageous environment might be on the way.Returns are also being held back somewhat by the company's expansion efforts, but we believe this will be value-creative in the long run. W.R. Berkley has been pursuing opportunities to replicate its business model in other countries. While the record of insurers moving into foreign markets is mixed, we think W.R. Berkley's experience running a decentralized model will be a benefit. International results have not been impressive in an absolute sense, with the combined ratio running at about 100% in recent years, but this is to be expected as the investment to establish the businesses front-runs the growth. More recently, the company has been attempting to exploit consolidation among leading players to pick off experienced underwriters and expand its domestic operations. However, we have a favorable long-term view of this opportunistic approach.As a result of these factors, we think W.R. Berkley's returns in the near term, while solid, will be a bit below what we believe is the franchise's normalized level. However, we remain confident that management's approach will favor shareholders in the long run.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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