W. R. Berkley Leveraging A Hard Market To Refuel For Growth

 

For insurers with a strong underwriting history and sound reserves, this period of rising insurance premiums (a "hard" market) is a great opportunity to write business that should be profitable for years to come. Likewise, insurers with low portfolio durations will soon have the opportunity to leverage higher rates.

W. R. Berkley (WRB) has all of that and more, including a strong track record in alternative investments and meaningful opportunities to grow their specialty and excess & surplus lines even as rate increases ease off. While Berkley shares are almost never conventionally cheap, and I do see some risk of sector-wide compression in multiples as premiums normalize, the total return potential isn't bad today, and this is at least worth a spot on a watchlist.

 

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W. R. Berkley Leveraging A Hard Market To Refuel For Growth

W. R. Berkley Reaping A Red-Hot P&C Market

 

All good things must eventually come to an end, including a P&C market that’s as hot as anything I’ve seen in my investment career. That, and a robust valuation, are really the only explanations I can come up with for W. R. Berkley’s (WRB) lackluster performance since my last update – the shares are up about 10%, narrowly underperforming the broader P&C market and underperforming the S&P 500 by a couple percentage points.

I don’t think the hard P&C markets are going to soften overnight, but pricing does seem to be trending down, and a combination of mediocre investment yields and rising inflation is not a good one for P&C insurers. I continue to believe that W. R. Berkley is one of the best-run insurance companies out there, and that the company will reap the benefits of business they’re writing today for a while, but it’s tough to call this an undervalued stock.

 

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W. R. Berkley Reaping A Red-Hot P&C Market

Arch Capital Reports Another Good, Balanced Quarter

All in all, business continues to go well for Arch Capital (ACGL). The Street seems a little more rational about the company’s mortgage insurance business relative to just a month or two ago, while the insurance business continues to do well relative to an environment with rising claims expense. This wasn’t the sort of result that’s going to change minds on the stock though. If you liked it before, you’ll almost certainly still like it and if you didn’t like it before, I’m sure you’ll work up some justification for that too.

As far as valuation goes, the 15% or so move from recent lows takes it out of “can't miss” territory and more into “decent long-term hold” territory. At this price, I believe investors can expect a high single-digit total annualized return, which isn’t bad from one of the best-run insurance companies out there.

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Arch Capital Reports Another Good, Balanced Quarter

Chubb Still Offers Some Value As The U.S. Market Improves

The last twelve months have not been good for P&C insurers in general, or Chubb (CB) in particular, as investors remain concerned about limited premium growth potential, claims inflation, reserve adequacy, and the prospect of value-destroying M&A. As it pertains to Chubb in particular, I think these concerns are overstated and I continue to believe that these shares remain undervalued relative to long-term earnings growth potential and the quality of the franchise. With fair value up into the mid-$150’s, I believe there’s still an argument for buying these shares.

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Chubb Still Offers Some Value As The U.S. Market Improves

Near-Term Trends Masking The Long-Term Potential For ProAssurance

Transitional periods are never fun, and ProAssurance (PRA) is likely looking at a couple of years where core earnings and book value growth will be pressured by rising claims costs. This is a sector-wide phenomenon, though, and many of ProAssurance’s competitors have been less conservative with their accounting assumptions and lack the same quality of reserves, which should lead to stronger industry-wide pricing.

Valuing ProAssurance is complicated by the likelihood that the near-term results aren’t really representative of the long-term earnings power of the business. Although there is a practical reality that insurance companies don’t usually outperform without underlying earnings and book value growth, I believe there is worthwhile long-term potential here.

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Near-Term Trends Masking The Long-Term Potential For ProAssurance

In A Still-Challenging Market, Chubb's Strengths Stand Out

Insurance has been one of the worst-performing segments of the finance sector, and Chubb’s (CB) superior quality hasn’t shielded it, as the shares are down about 4% over the past year and down about 10% year-to-date. While claim inflation and lower reserve releases are issues, as is the fact that last year’s catastrophe losses didn’t resolve the excess capacity issue in the industry, Chubb’s market position seems to be affording it above-average pricing power and the company’s capital position gives the company options to fund organic growth, M&A, or capital returns to shareholders.

I believe $145 to $155 is a fair price for Chubb shares, but investors will need to have some patience for this sector to come back into favor, as book value growth reaccelerates in 2019.

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In A Still-Challenging Market, Chubb's Strengths Stand Out

Rates And Loss Ratios Remain Risks, But Chubb's Valuation Is Getting Interesting

I have long thought that the managers of ACE, now operating under the name of Chubb (NYSE:CB) after that merger, are some of the best in the business and I continue to believe that that is a strong foundation for a positive investment thesis. That said, the P&C business has been flooded with capital and only recently have there been signs of rate improvement. At the same time, underwriting margins are getting squeezed and I’m worried about the outlook for loss trends.

Like many other insurers, Chubb has seen some share price weakness since January of this year, with the shares off about 10% from the 52-week high and up only a little bit over the last year. While I have some concerns about the impact of higher losses and lower reserve releases, that’s balanced by the reality that good names like Chubb don’t get all that cheap all that often. I do have some “falling knife” worries here, but the share price is getting to a point where long-term investors might want to freshen up their due diligence.

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Rates And Loss Ratios Remain Risks, But Chubb's Valuation Is Getting Interesting

W.R. Berkley Looking To Better Days, But The Market Is Already There

Commercial insurance companies are enjoying pretty high multiples on an historical basis, even though the market remains concerned about pressure on rates and claims inflation. W.R. Berkley's (WRB) recent performance is part of the reason I harp on valuations - although W.R. Berkley's operating results haven't been bad, the shares have lagged peers/rivals like Travelers (TRV), Hartford (HIG), and Chubb (CB) over the past year.

Looking at 2018 and beyond, I'm not bothered by W.R. Berkley's relative growth prospects. I think the company still has good growth prospects in a range of markets, and the company's more aggressive than average approach to investments (including real estate) has reliably contributed positively to income. My concern remains valuation, as the company trades at a high-teens multiple to forward EPS, and the shares seem to be factoring in a pretty exceptional level of growth.

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W.R. Berkley Looking To Better Days, But The Market Is Already There

W.R. Berkley Has A Lot To Live Up To

I understand that good companies should trade at a premium, but it is getting harder for me to reconcile W.R. Berkley’s (WRB) valuation with the realities in the insurance market today and the likely trajectory over the next few years. W.R. Berkley is a very well-run specialty insurance company, but rate growth is hard to find, claims severity is worsening in some lines, and reserves are looking a little thin across the industry.

The insurance industry is cyclical and the difficult market conditions of today will eventually improve, but the shares seem to be pricing in high single-digit long-term earnings growth, and I don’t think that leaves much upside in the share price.

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W.R. Berkley Has A Lot To Live Up To