We are maintaining our Neutral recommendation on the shares of W.R. Berkley Corp. (WRB) in anticipation of the second quarter results.
Last month, Berkley announced its estimated April-May catastrophe losses (cat losses) of $65 million, significantly higher than $35 million projected earlier. The Zacks Consensus estimates Berkley’s second quarter earnings at 50 cents per share. We expect second quarter earnings to be adversely affected by higher-than-expected cat losses.
Though the higher-than-average catastrophe losses in the first half of the year has caused heavy losses to reinsurers and insurers worldwide, we expect the set of events, coupled with a lack of underwriting discipline by participants, deteriorating loss trends, and modest investment returns will harden the reinsurance/insurance rates. The much anticipated return of a hard insurance market, after steady price declines for the past four years, will likely provide a sigh of relief to the ailing insurers.
Berkley, in our opinion, is one such industry participant, which will greatly benefit from a reversal in the insurance market cycle. The company has geared itself appropriately by starting 19 new units since 2006 (when the soft market cycle started) to take advantage of the eventual market turn. The different units started by the company are indeed bearing fruits.
Berkley witnessed a premium growth for the first time since the third quarter of 2006 in the second quarter of 2010. During the first quarter of 2011, the company recorded a 10% year-over-year increase in net premiums, attributable mostly to start-up units (representing 16% of the total 2010 premium volume), which contributed $60 million of net premiums.
Berkley also registered a rate uptick of 1% in the first quarter, which marked the first rate increase in aggregate for the group, in the last 17 quarters. With new units continuing to grow and established businesses no longer losing volume, an overall growth is setting in. Notably, the retention rate was 80% in the first quarter. Though the growth will not be rapid, an increased traction is expected in the International segment. 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. Therefore, we expect a very low premium increase in 2011, with momentum setting in 2012 as the new start-up goes in full swing, coupled with rate improvement.
Berkley’s dividend track record also remains commendable. During May 2011, the company hiked its annual dividend 14% 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 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%, which is quite fair and commendable for an insurance company given the hard time it had for the past four years.
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