W.R. Berkley Inches Ahead

W.R. Berkley’s (WRB - Analyst Report) third quarter earnings of 67 cents per share were only a penny ahead of the Zacks Consensus Estimate. In the year-ago quarter, the company had reported earnings of 63 cents.

Net income was $97 million, or 59 cents per share, compared with a loss of $27.9 million, or 17 cents per share in the prior-year quarter. Net premiums written declined 2.7% on a year-over-year basis to $969.3 million. Premium compression was led by lower business written in Regional, Alternative and Specialty segments. W.R. Berkley has been experiencing net premiums written pressure since the fourth quarter of 2006.

New business volume moderated during the reported quarter. These declines have been the result of increased competition and downward pressure on pricing since 2004. This trend continued in 2008, with overall price levels for renewal business declining, compared with the prior-year period.

Net investment income increased to $141.0 million from $122.3 million in the year-ago quarter. Losses and loss expenses decreased to $586.0 million from $694.3 million in the prior-year period due to lower earned premiums. Weather-related losses were $23 million, compared with $62 million in the prior-year period.

Combined ratio, which basically represents the percentage of premiums an insurer pays out in claims and expenses, improved to 95.0% in the quarter from 96.1% reported in the prior-year period.

Berkley has enjoyed a strong balance sheet and a lack of material exposure from legacy issues such as asbestos and environmental liabilities, which has resulted in additional visibility to the company’s earnings stream in the recent years. Operating return on equity improved during the quarter to 14.7%, compared with 11.4% in the prior-year period.

Common stockholder’s equity per share was $22.42, compared to $18.87 at the end of 2008.

Berkley has been suffering from an overall competitive business environment and pricing pressures witnessed by a decline in premiums written since the fourth quarter of 2006. However, pricing is expected to improve by the end of 2009.

Despite these headwinds, we believe that the company’s disciplined underwriting culture and its conservative investment philosophy will help it grow in the long run. Thus we maintain a Neutral recommendation on the shares.

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