Summary
- W.R. Berkley rose 41% while the S&P500 fell 17% over the past year.
- Recent quarterly results were outstanding with 11% growth in net premiums written and operating ROE of 17%.
- Over the past 3 years, free cash flow grew by an average of 55% per year and net income by an average of 14% over the same period.
- Higher interest rates favor W.R. Berkley's growth expectations, as it receives a higher yield on new bonds when interest rates have risen.
- The favorable outlook, attractive stock valuation and the share repurchase program make W.R. Berkley stock a buy.
Introduction
It has been a while since I last covered W. R. Berkley Corporation ( WRB ). Back then I gave a buy rating, and since then the stock has risen 4.5%. The S&P500 fell 17% in one year, while W.R. Berkley rose 42%. Over the past 10 years, the stock has risen sharply, averaging 17.1% per year. This is a strong result in an economically volatile environment.
William Robert Berkley has successfully engaged in capital allocation since his youth. These skills have helped him quickly grow the company into a large insurance company with a net written premium of nearly $10 billion.
The company is benefiting from rising interest rates, and analysts foresee strong growth in the coming years. The stock is reasonably valued and there are no signs of growth stagnation. Therefore, I stand by my previous rating and think the stock is a buy.
Quarterly Earnings Were Strong With An Operating ROE Of 17% And 15% Growth In EPS
On Oct. 24, third-quarter earnings came in above expectations, with 12% year-over-year revenue growth and 15% earnings per share growth over the same period. Net premiums written were up 10.8%.
Operating return on equity, excluding volatile investment results, came in at 17%. The combined ratio came in at 92.1%, higher than the previous quarter in which the combined ratio was exceptionally low at 87.8%. The combined ratio is the sum of the loss ratio and the expense ratio. The current quarter's combined ratio was below the 2020 and 2019 levels of 94.9% and 93.8%, respectively. W.R. Berkley has costs and claims well under control compared to profits. The higher profit was due to their short-term fixed income investments that benefited greatly from higher interest rates compared to last year.
Strongly Growing Results In Recent Years
In recent years, W.R. Berkley has grown strongly in both revenue, profits and free cash flow. Net profit has grown at an average annual rate of 14% over the past 3 years, while free cash flow has grown at an average annual rate of 55% over the same period.
W.R. Berkley expects higher profits due to rising interest rates; yields on new bonds are higher, increasing investment income. The value of current bonds falls as interest rates rise, but if they are held to maturity this will not be a problem. The Fed is leaning toward more interest rate hikes to cool high inflation. As a result, I expect W.R. Berkley to show strong growth over the next few years. Analysts on the Seeking Alpha WRB ticker page also expect positive growth. Starting in 2023, high single-digit revenue growth and low double-digit earnings per share are expected. These are strong growth prospects for W.R. Berkley.
W.R. Berkley Financial Results (SEC And Author's Own Graphical Representation)
Valuation In Line With 10-Year Average
The valuation of W.R. Berkley remains attractive. In the chart below, I show the PE ratio and the 10-year median. W.R. Berkley's P/E ratio is roughly in line with the 10-year median. The stock is priced higher in 2020, but that is mainly due to lower earnings per share in that year.
It seems that the YCharts P/E ratio chart is slightly different from the actual PE ratio. Still, W.R. Berkley's P/E ratio (P/E ratio concerns 16.9) is lower than the S&P500's P/E ratio of 20. W.R. Berkley is valued more attractively than the stock market in general.
Furthermore, the outlook for earnings per share is fine and 10 out of 11 analysts have raised their expectations . Earnings per share are expected to rise to $5.46 through the end of 2024 (an increase of 14% per year on average).
Earnings Estimates (WRB Ticker Page On Seeking Alpha)
W.R. Berkley's Dividend Payments And 4% Buyback Yield
In my previous article I described that W.R. Berkley distributes their profits well to their investors by paying dividends and repurchasing shares. In 2022, no shares have been repurchased yet, so 10 million shares remained under the authorization of the share repurchase program, this represents a repurchase yield of almost 4%. In addition to the share repurchase program, the forward dividend is $0.40, representing a dividend yield of 0.55%.
The stock has potential to rise further when W.R. Berkley repurchases shares.
WRB's Cash Flow Highlights (SEC and Author's Own Calculation)
Conclusion
W.R. Berkley rose 41% while the S&P500 fell 17% over the past year. This was due to strong revenue growth, earnings growth and free cash flow growth. Recent quarterly results were outstanding, with 11% growth in net premiums written and operating ROE of 17%. Over the past 3 years, free cash flow grew by an average of 55% per year and net income by an average of 14% over the same period.
To cool inflation, the Fed acts by raising interest rates. Higher interest rates favor W.R. Berkley's growth expectations because W.R. Berkeley receives a higher yield on new bonds when interest rates have risen. More than 10 out of 11 analysts raised their outlook and see a bright future ahead. Earnings per share are expected to grow in low double digits. The stock's valuation is in line with W.R. Berkley's 10-year median and its valuation looks more favorable than that of the S&P500.
In addition to a favorable valuation, W.R. Berkley still has a share repurchase program underway where they are authorized to repurchase 10 million shares. This equates to a buyback return of nearly 4%. The share repurchase program is a catalyst to increase the share price as demand for their shares increases and supply decreases. The favorable outlook, attractive stock valuation and the share repurchase program make the stock a buy.
For further details see:
W.R. Berkley Is A Great Capital Allocator