W.R. Berkley Earnings: A Hard Market Continues to Lead to Strong Returns

We believe disciplined underwriters such as W.R. Berkley WRB have higher leverage to hard market conditions and think the second quarter provides further support for this idea. Attractive underwriting margins and better investment results led to a 21% annualized ROE for the quarter, highlighting the strong excess returns the narrow-moat company is capable of in a favorable environment. We will maintain our $63 fair value estimate and see shares as fairly valued.

Net written premiums increased 9% year over year. Management stated that average rate increases excluding workers’ compensation were 8%. While W.R. Berkley had been very aggressive in the earlier stages of the hard market, this quarter suggests growth is now coming primarily through pricing increases and that the company is finding fewer attractive opportunities as we move deeper in the hard market.

The combined ratio for primary lines came in at 91.1%, compared with 88.7% last year. Sequentially, the combined ratio improved 40 basis points. The company’s relative aversion to catastrophe losses was a positive, as catastrophe losses were not a major factor despite elevated industry losses. W.R. Berkely’s underwriting margins appear to be flattening out, albeit at an attractive level, and we’ve seen a similar trend at peers. This suggests that underwriting profitability may have peaked.

In addition to strong underwriting results, W.R. Berkley is benefiting from the higher interest rate environment. In the quarter, investment income increased 43% year over year. Management had previously tactically shortened fixed income duration; this is now paying dividends in the current environment and allowing the company to realize this benefit more quickly than its peers. We think the company’s underwriting discipline and investment positioning puts the company in a strong position relative to peers in the near term.