W.R. Berkley Earnings: Better Pricing and Higher Interest Rates Continue to Drive Strong Returns

Coming into the year, we thought W.R. Berkley WRB was one of the best-positioned insurers, and the company’s third-quarter results further reinforce that opinion. On the underwriting side, W.R. Berkley is encountering ongoing benefits from a harder pricing market. On the investment side, management’s previous decision to lower fixed income duration has paid off this year. Finally, the company’s relatively low catastrophe exposure reduces a drag that some other insurers are seeing right now. The net result was an annualized return on equity of 19.8% for the third quarter. We think the narrow-moat company is built to exploit attractive market conditions, and W.R. Berkley seems to be seizing on the current opportunity. We will maintain our $65 per share fair value estimate and view the shares as roughly fairly valued right now.

Net written premiums were up 10.5% year over year during the third quarter, with management stating that average rate increases excluding workers’ compensation were 8.5%. As we move deeper into the hard market, pricing appears to be the primary catalyst for growth, suggesting the company is experiencing fewer incremental opportunities. On top of that, we’ve noticed underwriting margins for W.R. Berkley and peers start to level out this year, which looks to still be the case. The reported combined ratio from primary lines for the insurer came in at 91.0%, compared with 91.2% last year, and 91.1% last quarter.

During the low-interest-rate period, W.R. Berkley made the decision to lower its fixed income duration, and that move is paying off now that rates have risen. During the third quarter, net investment income increased 34% year over year. We think the company’s ability to cycle into higher interest rate instruments faster than peers is a meaningful boost to its relative returns at the moment.