2023-06-15 16:19:45 ET
Summary
- Insurance equities have fallen sharply out of relative favor since late February.
- With shares on the decline, I see value in W. R. Berkley given its low valuation and robust EPS outlook.
- But with a bearish chart and a downtrend in place, the technical risk counters WRB's value case.
Once a darling market niche, the insurance space has endured steep relative losses to the broad market. I track how well the SPDR S&P Insurance ETF ( KIE ) is doing compared to the S&P 500. Since March, KIE has produced about 20 percentage points of negative alpha. That span includes the US regional banking crisis and the latest stretch of superior returns among mega-cap growth equities.
I have a hold rating on W. R. Berkley. While I see fundamental upside when eyeing its EPS growth outlook and current valuation, the technical situation is quite poor, and proper risk management is required on this insurer with very poor momentum .
Value-Focused Insurers Suffer Compared to the Growth-Driven SPX
Stockcharts.com
According to BofA Global Research, WRB is a pure-play specialty insurance conglomerate with a number of businesses operating in the excess & surplus (E&S) marketplace. The company has assembled a collection of over 50 unique businesses, each run with partial autonomy by entrepreneurial management incentivized to deliver top-tier performance in their focused silos. The company has a more equity-market-sensitive investment strategy, with an emphasis on private equity market opportunities.
The Connecticut-based $14.7 billion market cap Property and Casualty Insurance industry company within the Financial sector trades at a low 14.8 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.7% dividend yield, according to The Wall Street Journal.
There was hopeful news back on June 14 when WRB’s management team raised the company’s quarterly dividend by 10%. But back on April 20, shares plunged after the firm reported a Q1 earnings miss driven by weaker margins. Larger-than-expected catastrophe losses hurt the bottom line, while its loss ratio was higher than feared.
On the bright side, WRB reported a strong policy renewal rate of 9.3%, a 1-year-high, which bodes well for margins looking ahead to the second half. Moreover, it was reported that W. R. Berkley was a significant buyer of its shares earlier this year (although the average purchase price, north of $66, is far higher than where shares trade today).
The firm has historically enjoyed a valuation premium to its peers, so if the management team can recover from the poor Q1, then a re-rating higher is possible as 2023 progresses. Key risks would be lower market interest rates and further volatility in its catastrophe book.
On valuation , analysts at BofA see earnings rising at a solid pace this year before per-share profit growth in the out year rises sharply. EPS is then seen just shy of $6 by 2025. The Bloomberg consensus forecast is more sanguine compared with BofA’s outlook. Dividends, meanwhile, are expected to rise steadily over the coming quarters to a net yield of about 3%.
With both WRB’s operating and GAAP P/Es in attractive territory considering the earnings growth trajectory, shares appear to be a bargain. Let’s dig deeper, though.
WRB: Earnings, Valuation, Dividend Forecasts
BofA Global Research
WRB’s forward earnings multiple of just 11.7 is at a steep 37% discount to its 5-year average of 18.6, though the ratio is a bit above the sector median. As a stable insurer, it warrants a slightly higher P/E than the overall sector. If we apply a 14 multiple (between its peers and WRB’s historical mean) on $5 of the next-12-month EPS, then the stock should be near $70. So, I have it as a buy on valuation, but there's more to the story.
WRB: Shares On Sale Compared To Its Historical Multiples
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, July 20. The stock trades ex-div next Friday (June 23) with no other volatility catalysts expected.
Corporate Event Risk Calendar
Wall Street Horizon
The Technical Take
While I like the growth story and fundamental valuation on W. R. Berkley, the chart leaves something to be desired. Notice in the graph below that shares have fallen under what I consider to be key support at the low $60s. There was a significant gap down in price around its April earnings release, and that gap has not even come close to being filled. In this case, the bulls might have a challenging time doing so, as that would mean a share price recovery above the noted resistance.
What’s more, the RSI momentum index at the top of the chart is in the bear 20 to 60 zone. Lastly, the long-term 200-day moving average trend indicator is downward sloping – that tells me the bears are indeed in charge. I see support roughly $10 lower at $47 – that is the late 2020 peak and Q3 2021 pullback low.
Overall, it is not an encouraging technical perspective, not to mention the steep relative weakness compared to the broad market this year.
WRB: Under Key Resistance, Eyeing A Test of the Late 2021 Lows
Stockcharts.com
The Bottom Line
I am a hold on WRB. While I like its valuation, the bearish chart plays a primary factor in my outlook.
For further details see:
W. R. Berkley: Poor Momentum Offsets The Value Case For Now