WR Berkley

W.R. Berkley has been producing strong results recently due to industry tailwinds and the second quarter showed the company maintaining a steady path.

Why it matters: W.R. Berkley generated an annualized return on equity of 19% in the quarter, in line with recent results but above its historical midteens average. Reported underwriting results improved a bit in the quarter, with the combined ratio in the Insurance segment improving to 91.4%, compared with 92.2% in the previous quarter and 92.1% last year. However, underwriting margins excluding catastrophe losses held basically level with results in recent quarters. We think W.R. Berkley is relatively well positioned at the moment given that pricing in casualty lines, which are its focus, is holding up much better than property lines. However, net written premium growth for the Insurance segment remained muted at 4% year over year, and the reinsurance segment continued to see a decline, suggesting attractive opportunities are likely dwindling.

The bottom line: We will maintain our $58 fair value estimate for the narrow-moat company and see shares as overvalued. While we appreciate current industry tailwinds and W.R. Berkley's ability to maintain strong returns in an attractive environment, we think the market is extrapolating this favorable period too far into the future, resulting in industry valuations that are stretched, from a long-term perspective. We believe weaker pricing will be the primary catalyst for a move back toward more normalized returns and see signs that this is already occurring in certain lines. In addition to strong underwriting results, W.R. Berkley continues to see positive trends on the investment side, with net investment income up 10% year over year and income from fixed income investments up 12%, although this was mainly driven by higher balances.

Our fair value estimate for W. R. Berkley is $58 per share, which is equivalent to 2.3 times 2025 year-end book value and 2.3 times book value excluding goodwill and accumulated other comprehensive income.

We expect a modest 3% compound annual growth rate for net earned premiums over the projection period. We believe the strong pricing increases that W.R. Berkley and its peers have enjoyed in recent years have come to an end. We expect only modest top-line growth for W.R. Berkley as fewer attractive opportunities become available. We forecast the combined ratio to average 93%, worse than recent results but roughly in line with the company's average over the past 10 years. In the near term, we expect underwriting results to remain better than the historical average due to a stronger pricing environment and the significant improvement the company has seen in its expense ratio over the past few years, as it leveraged expansion efforts.

Higher interest rates have been a material near-term tailwind, as the company had maintained a relatively low fixed-income duration previously and has seen a quicker uptick in investment income. We expect the positive effect to level off going forward. We expect underwriting results to worsen in the back half of our projection period, as higher interest rates reduce the need for underwriting income and market conditions start to normalize.

Our projection results in an adjusted average return on equity of 18% over the next five years, materially better than the 15% average over the past 10 years. By the end of our projection period, ROE has pulled back to a level roughly in line with the historical average.

We use a cost of equity of 8.9% in our valuation.

In general, property-casualty insurers do not benefit from favorable competitive positions. Industry competition is intense, and the products are essentially commodities. Furthermore, participants may not know their cost of goods sold for several years, causing them to underprice policies without realizing it. Firms have a large incentive to chase growth without regard for profitability, a cycle that repeats itself as competitors are forced to match artificially low prices or risk losing business.

However, we believe W.R. Berkley has set itself apart from the industry by focusing on specialty lines, which are subject to less competition than traditional insurance lines, and we believe the company has a Morningstar Economic Moat Rating of Narrow. About 30% of the company's premiums are generated in excess and surplus lines. This, combined with Berkley's focus on long-term value, allows it to write business at favorable prices while maintaining the discipline to decline underpriced policies. This shows in the company's loss ratio, which averaged 62% over the past 10 years, well below the industry average.

While this is partially offset by a higher-than-average expense ratio given the need to maintain a staff of experienced underwriters (W.R. Berkley's expense ratio averaged 30% over the past 10 years), the gap in the loss ratio is sufficient to generate significant excess returns over time, in our view. Additionally, we believe the company's expense ratio had been somewhat elevated during much of this period, as W.R. Berkley expanded into new lines and geographies. More recent results indicate the company has now leveraged these investments, which should improve its already impressive underwriting results.

A decentralized operating structure allows Berkley to develop expertise in a number of profitable niche fields.

Berkley has demonstrated the foresight to enter and exit insurance lines as market opportunities wax and wane.

With relatively low exposure to catastrophe risks, Berkley's results are less likely to be affected by unpredictable weather events or global warming.

The company's reinsurance operations are a drag on overall results.

The investment in international opportunities creates a point of uncertainty, and the company's limited disclosure makes it difficult to track results.

During soft pricing periods, Berkley will struggle to earn meaningful excess returns, as it is unwilling to reduce staff.