We are downgrading our recommendation on W.R. Berkley Corp. (WRB) to Underperform from Neutral, reflecting slightly lower investment yield assumptions and modestly higher loss ratio forecasts, which would eat into underwriting margins.
During the second quarter conference call, management expressed its concerns over rising loss costs and stated that the loss claims may accelerate over time. The trend of loss claims shows a divergence from declining losses over the past several years. An increase in claim cost will offset the premium rate improvement seen lately, thus keeping the underwriting margins under pressure.
Premiums at Berkley have declined continuously since the third quarter of 2006. However, growth in premium has been witnessed for the past five quarters. The improvement came in mostly from the new start-up units, while its old units continued to post very modest premium growth.
With a continued competitive market landscape and soft pricing environment, we expect the historic business lines to persist, posting very low premium growth, which will nullify growth from new initiatives to some extent
The low interest rate environment, likely to continue through 2012, is expected to pressure investment income as the funds get reinvested at lower yields.
Positives at Berkley include its rapidly growing International business in the emerging markets of Asia, South America, and the Nordic regions of Europe.
Berkley’s numerous newly started ventures are also bearing fruit, and they position the company to take advantage of the eventual market turn. Also, signs of improving audit premiums and mid-term endorsement of additional units of exposure indicate that the pressure on insured revenue and payrolls is deceasing.
Berkley’s dividend track record also remains commendable. During May 2011, it declared a 14% increase in its annual dividend to 32 cents per share. This represented the seventh straight increase from 12 cents paid in 2005. The company has grown its annual dividend by an average of 18% annually over the past five years. The most recent increase of 14% is almost in line with the average, with the annualized dividend yield being 1.00%, which is quite fair and commendable for an insurance company given the beating it received for the past four years.
Greenwich, Connecticut-based Berkley competes closely with The Travelers Companies, Inc. (TRV) and Hartford Financial Services Group Inc.(HIG).
The stock carries a Zacks #5 Rank indicating selling pressure over the near term.
