Berkley Beats EPS Ests, Misses Rev

W.R. Berkley Corporation (WRB - Analyst Report) reported second quarter core operating earnings of 65 cents per share, 3 cents ahead of the Zacks Consensus Estimate. The earnings beat came on the back of higher premium written, pricing gains, higher investment income and a lower share count. Earnings were also up 41% year over year.

On a GAAP basis, net income was up 38% year over year to 76 cents per share.

Second quarter revenue of $1.42 billion was up 12% year over year but lagged the Zacks Consensus Estimate of $1.45 billion. The year-over-year increase was attributable to higher premiums earned, investment income, insurance fee service and investment gains.

Berkley’s net written premium for the quarter was approximately $1.19 billion, an increase of 12.6% year over year. The company saw broad-based growth with each of its operating segments reporting higher premium.

Net investment income was $161.3 million in the quarter, up 8.2% year over year.

Total expenses also increased 9.1% year over year to $1.27 billion due to an increase in loss and loss expenses, other operating costs, and interest expenses, partially offset by lower expenses at wholly-owned subsidiaries.
Berkley recorded a combined ratio of 98.2%, better than 101.2% in the prior-year quarter.

Segment Details

The Specialty segment’s net premium written was up 12.0% year over year to $454.0 million. Combined ratio deteriorated 160 basis points to 94.3% in the quarter due to a higher loss ratio as well as a slight increase in expense ratio.

Net premiums written in the Regional segment edged up 2.7% year over year to $291.0 million. Combined ratio improved substantially to 103.3% from 114.1% in the year-ago period.

The Alternative Markets reported a 21.2% increase in net premiums written to $147.6 million in the quarter. Combined ratio improved 180 bps to 97.8% in the quarter, led by lower expense ratio.

Net premiums written in the Reinsurance segment increased 13.9% year over year to $113.4 million. Combined ratio improved 140 basis points year over year to 99.4%.

The International segment recorded the highest growth in net premiums written among the segments. Net premiums written surged 22.5% year over year to $208.3 million. Combined ratio also improved 50 basis points year over year to 99.5%.

Book value per share, a measure of net worth, increased to $30.68 from $28.75 per share, at the year end 2011. Return on equity increased 200 basis points year over year to 11.0% signifying improved profitability.

Berkley repurchased 1.3 million shares of its common stock at an average cost of $37.56 per share.

Our Take

Berkley has maintained its trend of beating earnings estimates in the reported quarter as well. The company has positioned itself well for the period ahead by forming several new units over the past 3-4 years. Premiums written for its core business have increased and the new units are catching up. Average renewal rates are on the rise and so is the price trend.

Berkley’s balance sheet is one of its major strengths. The company has maintained its practice of increasing yearly dividends. In our view, Berkley is well poised to return value to its shareholders over the long term.

Berkley currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are also maintaining our long-term Neutral recommendation on the shares.

Last week, Berkley’s peer The Travelers Companies,Inc.(TRV - Analyst Report) reported operating earnings of $1.26 per share in the second quarter of 2012, lagging the Zacks Consensus Estimate of $1.38 per share.