We are upgrading our recommendation on W.R. Berkley Corp. (WRB) to Neutral from Underperform on the back of third-quarter earnings beat. The company reported earnings of 44 cents per share, 6 cents ahead of the Zacks Consensus Estimate. The outperformance stemmed from higher contribution from the International and Specialty segments.
For three quarters in a row, Berkley has been witnessing a stable retention and a general rate hike. Also, the company has maintained the trend of premium growth for the past many quarters.
During the third quarter, the company witnessed a 14% year-over-year growth in net premiums. The growth is, however, attributable mostly to start-up units. Since 2006, when the soft market cycle initiated, the company has made investments in 21 new business units to take advantage of the eventual market turn.
The quarter also witnessed a rate increase of 3%, making it the third successive quarter of increasing prices. With new units continuing to grow and established businesses no longer losing volume (retention rate was 80% for three successive quarters), growth overall is visible.
Also, signs of improving audit premiums and mid-term endorsement of additional units of exposure indicate that pressure on insured revenue and payrolls is decreasing. Though we expect a low premium increase for full year 2011, we hold a more optimistic growth outlook for 2012, with momentum gaining pace as the new start-ups go into full swing coupled with rate improvement.
In addition to the start up units, Berkley’s International unit is also showing impressive growth (gross premium written up 37% y/y for FY10), which is surpassing the growth of 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 came from the emerging markets of Asia, South America, and the Nordic region of Europe. We expect Berkley’s international earnings to be a significant contributor to its overall growth, enabling it to compete with peers like The Travelers Companies, Inc. (TRV) and Hartford Financial Services Group Inc.(HIG).
However, Berkley faces some headwinds like a low interest rate environment, increasing loss ratio and a lack of strong pricing momentum.
Despite the headwinds, Berkley has been creating shareholders value by resorting to investor-friendly measures such as dividend payment and share repurchase. During May 2011, it declared a 14% increase in its annual dividend to 32 cents per share, representing the seventh consecutive increase from 12 cents in 2005. Over the past five years, the annual dividend of the company has been growing at a rate of 18% per year.
Berkley currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating.
HARTFORD FIN SV (HIG): Free Stock Analysis Report
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BERKLEY (WR) CP (WRB): Free Stock Analysis Report
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