Property and Casualty insurer W.R. Berkley Corp. (WRB) is slated to release its second quarter earnings on July 25, after the market closes. The current Zacks Consensus Estimate is 43 cents per share for the quarter, projecting a year-over-year decline of 33.8%.
With respect to earnings surprise, Berkley has consistently outperformed the respective Zacks Consensus Estimates over the trailing four quarters. The average earnings surprise has been 3.13%, implying that Berkley has outpaced the Zacks Consensus Estimates by the same magnitude over the last four quarters.
First Quarter in Brief
In the first quarter of 2011, Berkley’s operating earnings of 66 cents per share came in 2 cents ahead of the Zacks Consensus Estimate, on the back of a premium growth.
Total revenue of $1.23 billion also beat the Zacks Consensus Estimate of $1.1 billion and improved 5% from $1.15 billion recorded in the first quarter of 2010. The improvement was largely driven by higher premiums and higher investment gains.
Total expenses increased 4.5% year over year to $1.07 million mainly due to an increase in losses and loss expenses, operating costs and interest expenses. Combined ratio deteriorated 220 basis points year over year to 96.4%.
Estimate Revision Trend
For the second quarter, analysts’ estimate revision trends have been significant over the past one month. Over the last 30 days, 8 out of the 13 analysts covering the stock have pulled down their estimates. However, there were no downgrades over the past seven days. Also, none of the analysts have made upward revisions over both the time periods.
A similar trend was noticed for fiscal 2011 estimates, which saw 10 downgrades (out of 12 analysts) over the last 30 days. But there were no downgrades over the past seven days. Also, there was no upward revision during both the time periods.
2 out of 11 analysts have revised their third quarter estimates upward, while 1 has revised its estimate downward over the past seven days. Moreover, there has been no upgrade or downgrade over this time period. The Zacks Consensus Estimate for the third quarter is pegged at 62 cents per share, which translates into a year-over-year decline of 8.14%.
Magnitude of Estimate Revisions
The magnitude of revisions has been significant over the past one month, with estimates for the second quarter declining to 43 cents from 59 cents. However, over the past seven days, no change in estimates was seen. For fiscal 2011, 30-day estimates declined to $2.38 from $2.58, while seven-day-old estimates remained at par with the current level.
Our Recommendation
Since the second quarter of 2010, Berkley has maintained the trend of premium growth. The second quarter of 2010 marked the first premium growth since third quarter 2006. The company witnessed a 10% year-over-year hike in net premiums during the previous quarter. The growth is, however, attributable mostly to start-up units (representing 16% of the total premium volume for fiscal 2010), which contributed $60 million of net premiums.
Berkley has started 19 businesses since 2006 (when the soft market cycle started) to poise the company to take advantage of the eventual market turn. The first quarter saw a rate increase of 1%; it was the first time in 17 quarters that the rate increased in aggregate for the group. With new units growing continuously and established businesses no longer losing volume (retention rate was 80% in first quarter), an overall growth is setting in. Though the growth will be slow, an increased traction is expected in the International segment. Also, improving audit premiums and mid-term endorsement of additional units of exposure indicate that the pressure on insured revenue and payrolls is deceasing.
Besides the start-up units, Berkley’s International unit is also showing an impressive growth (gross premium written was up 37% year over year in 2010), which is surpassing growths from other segments (Specialty GPW up 4.2%, Regional GPW down 5.7%, Alternative Market GPW up 5.7%, and Reinsurance down 3.7%). Premium growth in the international unit mainly ensued from the emerging market regions of Asia, South America, and Nordic regions of Europe. However, management stated that the double-digit rate growth, witnessed over the past three to four quarters, will taper off a bit heading further into 2011 and 2012.
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 hike from 12 cents paid in 2005. The company has grown its annual dividend by an average of more than 18% annually over the past six years. The most recent increase of 14% is almost in line with the average, with the annualized dividend yield being 1.00%. This is quite fair and commendable for an insurance company given the beating it had for the past four years.
Berkley’s investment income, comprising nearly 70% of pre-tax income, has been suppressed for the past couple of years. The declines in investment returns have been a huge headwind for the largest segment of the company’s profitability. Given the persistently low reinvestment rates and average portfolio duration of nearly 3.6 years, we see limited improvement in this key profit driver until 2012. However, we note that the company does not have any subprime exposure.
In our view, Berkley’s second quarter earnings will be affected by higher-than-expected catastrophe losses (cat loss) of $65 million. Moreover, according to forecasts, this year’s hurricane season (June to November) is expected to witness some severe hurricanes. This might cause the company to incur significant losses in the second half of the year. If the losses caused by hurricanes do not get offset by income from premium, earnings might decline. Clarity on this point will come out with the second quarter earnings, when management reveals the details on cat losses and premium rates behavior.
Greenwich, Connecticut-based Berkley competes with The Travelers Companies, Inc. (TRV), which reported second quarter loss 91 cents, wider than the Zacks Consensus Estimate of a loss of 62 cents per share, led by huge cat losses. Another competitor Hartford Financial Services Group Inc.(HIG) charted out its preliminary results for second quarter 2011 earlier during the month and stated that it expected earnings to drop 68% due to storm losses and increased litigation costs.
HARTFORD FIN SV (HIG): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
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