W. R. Berkley: Expect Share Price, Dividends To Rise As The Company Throws Off Cash (WRB)

Insurance company W. R. Berkley Corporation (NYSE:WRB) is throwing off so much cash that it’s a money-printing machine.

At the end of 2021, the company had free cash flow of $2.28 billion, a 30% increase over 2020. For 2022, free cash flow should rise an additional 5% to $2.4 billion.

And the company has been returning cash back to shareholders. In March, the company approved a 3-for-2 common stock split, which was paid as a special stock dividend. In June, the company raised the annual dividend 15.3% to 40 cents a share.

Then on Jan. 3, the company declared another special cash dividend of 50 cents per share on its common stock. In addition, I think the annual dividend will rise another 15% in 2023. Currently, the dividend yield is 0.54%

This leads me to believe that Berkley’s shares are undervalued at $74 and will post a 15% annual gain each of the next two years to hit $100 a share by 2024. Berkley has a market cap of $19.7 billion and current trades at a forward P/E ratio of 19.

Based in Greenwich, Conn., the insurance holding company is one of the largest commercial line writers in the U.S., focusing on two segments of the property casualty business: insurance and reinsurance & monoline excess. Since going public in 1973, Berkley has compounded book value at a rate of 15% a year.

“In the third quarter of 2022, global commercial insurance prices rose 6%, on average, compared with the 9% increase in the second quarter. It was the twentieth consecutive quarter of rising average pricing in the Marsh Global Insurance Market Index. Increases peaked in the fourth quarter of 2020 at 22% and have generally slowed or remained flat since,” according to MarshMcLennan.

Despite 2022 being a bad year for insurers with all the catastrophic storms, the S&P Insurance Select Industry Index rose 5% in a year when the broad market fell nearly 20%. Compared to that, Berkeley had a great year, rising 33.7%.

For the third-quarter, revenues climbed 12% to $2.72 billion and net income fell 12% to $229 million from $261 million in the year-ago quarter. The decline was primarily due to Hurricane Ian.

Yet for the nine months ended Sept. 30, revenues jumped 18% to $8.2 billion, and net income surged 37% to $999 million, compared with $728 million in the same period in 2021. WRB is scheduled to report its fourth quarter earnings by the end of this month.

In 2021, earnings per share nearly doubled, rocketing 96% to $3.66. Valueline expects 2022 earnings per share to climb 16% to $4.25, and another 11% to $4.70 in 2023.

Return on equity jumped 13.8% in the third quarter and 20% for the first nine months of the year.

Currently there are four trends shaping the future of property and casualty insurers, according to Zacks.

• The ability to implement price hikes and charge higher premiums. Global commercial insurance prices grew 6% in the third quarter, marking the 20th consecutive quarter of price increases.
• The industry is witnessing increased mergers and acquisitions as companies look to gain market share.
• The industry is increasing its use of technology to save costs, make filing claims easier, and to expedite business operations.
• The final trend is the increasing number of catastrophes, which can have a big effect on underwriting profits. Many industry players saw underwriting profitability fall due to the claims from Hurricane Ian coming in between $50 billion and $65 billion, according to Swiss Re.

In 2022, there were 14 severe weather events, according to Yale Climate Connections. Hurricane Ian’s damages may well top $100 billion, said insurance broker Gallagher Re, making it one of the top-five most expensive weather disasters in world history.

“Better pricing, prudent underwriting and favorable reserve development will help withstand the blow,” said Zacks.

Berkley saw net premiums earned climb 19.6%, thanks to healthy rate increases across most product lines, coupled with new business wins, according to Value Line, adding that the company has a high-quality book of business. Net investment income also helped, rising 2% on the Federal Reserve’s interest rate hikes, which boosted fixed-income yields.

Among the stock’s risks are that some of the good news is already priced into the shares. It trades at a premium in terms of book value. At 2.8 times book, Berkley trades at a higher multiple than the financial sector. Among the 22 insurers in the S&P 500, the average book value is 1.5 and 14.5 times earnings, according to Grant’s. So, you’re paying a premium to own the best in breed of the model line insurers. For instance, Everest RE trades at 1.3 times book.

Overall, it’s a good long-term investment because they’ve been compounding book value. If it were to trade at 19 times this year’s earnings, it would be a $89 stock, 15 points higher than today. Then another 15% increase would take it to $102 in 2024.

“Finally, management’s interests are aligned with investors. CEO William Robert Berkley Jr. and his father, Chairman William Robert Berkley, are required to hold shares equal to 10 times their base salary, while other named executive officers are required to hold stock worth three times their annual pay. All in all, officer and directors own 22.4% of the company they manage,” according to Grant’ Interest Rate Observer.