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Morningstar | W.R. Berkley’s 4Q Solid Considering Catastrophes

While higher than normal catastrophe losses weighed a bit on W.R. Berkley’s overall fourth-quarter results, we think the quarter confirms management’s wisdom in maintaining a relatively low exposure to these types of events. We continue to believe that, among commercial P&C insurers, W.R. Berkley stands out for the relative stability in its underwriting results. For the quarter, annualized ROE was 10%, and 12% for the full year. The full-year ROE result represents a meaningful premium to our estimated cost of equity, which supports our narrow moat rating for the company. We will maintain our $71 fair value estimate.

Net written premiums in the insurance segment were up only 3% year over year, suggesting management remains cautious in the current pricing environment. In our view, while management’s discipline in this regard can weigh on near-term results due to fixed costs, we think this is the most value-creative approach from a long-term perspective. The combined ratio in the quarter crept up slightly to 94.7% from 94.4% last year. The loss ratio increased 80 basis points, largely due to higher catastrophe losses. However, this was largely offset by a 50 basis point decline in the expense ratio. From a long-term perspective, we see changes in the expense ratio as more important than fluctuations in the loss ratio. In recent years, W.R. Berkley has invested to expand its business, and should be able to leverage those costs over time. If the decline this year marks the start of a trend, the company’s base underwriting results could see material improvement.

After a series of significant declines, net written premiums in the reinsurance segment stabilized in the quarter on a year-over-year basis. However, in part due to catastrophes, profitability remains poor, with a combined ratio of 109.3% for the quarter and 106.4% for the year. While there is likely some floor on reinsurance activity and W.R. Berkley may be approaching it, we remained concerned about reinsurance operations as we see the current overcapacity in this area as structural, and losses this year highlight the potential risks. Still, management’s track record inspires confidence that they will navigate this situation responsibly, and full-year net written premiums are down 12%.