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Analyst Blog

On November 3, 2011, property and casualty insurer W. R. Berkley Corp. (WRB - Analyst Report) announced that its Board has increased its share repurchase authorization to 10 million shares, which translates into approximately 7% of the company’s 144.5 million outstanding shares as of September 30, 2011.

The buyback increases a company’s earnings per share by reducing the number of shares outstanding and is also indicative of the fact that the company’s financial position is strong enough to enhance shareholder value.  

Berkley has been aggressively repurchasing shares. Since 2007, it has bought back about 30% of its outstanding shares.

The latest share repurchase authorization marks such a move for the second time so far this year.  The company has taken similar action earlier in May.

Berkley has been aggressively buying back shares to support its bottom line amid weak property and casualty market. The company has been facing premium declines since the onset of soft market conditions in 2006. To position itself for growth, the company has made a number of investments and has started 21 new units in the past three years.

Though recently, management spoke about improvement in insurance rates in certain lines of businesses, a sustainable turnaround in the underwriting cycle is yet to be seen. In addition to theits annual dividend by an average of more than 19% annually over the past five years, giving an implicit signal of confidence in the strength of its balance sheet and reserve position.

Low interest rates are adversely affecting profitability, by limiting return on investment. Until these conditions improve, we expect the company would continue to take defensive actions like share buybacks. On the other hand, the company announced the regular quarterly dividend of 8 cents per share which was raised last quarter from 7 cents per share. Dividends at Berkley have increased at a 5-year CAGR of 24%.

We maintain our Neutral recommendation on W. R. Berkley. The stock also retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Berkley competes closely with a host of property and casualty carriers such as The Chubb Corp. (CB - Analyst Report), The Travelers Companies (TRV - Analyst Report), XL Group plc (XL - Analyst Report) and The Allstate Corp. (ALL - Analyst Report).

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