P&C insurers can pay up to $100 million in claims from Hurricane Ian, which tore down this industrial building with wrecked cars in Florida. Bilanol/iStock via Getty Images
WR Berkley Corporation Insurance Company (NYSE: WRB) generates so much money that it is a money-printing machine.
At the end of 2021, the company had free cash flow of $2.28 billion, an increase of 30% over 2020. For 2022, free cash flow is expected to increase an additional 5% to reach $2.4 billion.
And the company returned cash to shareholders. In March, the company approved a 3-for-2 common stock split, which was paid out as a special stock dividend. In June, the company increased the annual dividend by 15.3% to 40 cents per share.
Then, on January 3, the company declared another special cash dividend of 50 cents per share on its common stock. Also, I think the annual dividend will increase another 15% in 2023. Currently the dividend yield is 0.54%
This leads me to believe that Berkley shares are undervalued at $74 and will post a 15% annual gain each of the next two years to reach $100 per share by 2024. Berkley has a market capitalization of 19.7 billion and is currently trading at a P/E ratio of 19.
Based in Greenwich, Connecticut, the insurance holding company is one of the largest commercial insurers in the United States, focusing on two segments of the property damage business: insurance and reinsurance and monoline deductible. Since its IPO in 1973, Berkley has compounded its book value at a rate of 15% per year.
“In the third quarter of 2022, global commercial insurance prices increased by an average of 6%, compared to an increase of 9% in the second quarter. This was the twentieth consecutive quarter of average price increases in the Marsh . World insurance market index. Increases peaked in the fourth quarter of 2020 at 22% and have generally slowed or remained flat since,” according to MarshMcLennan.
Although 2022 was a bad year for insurers with all the catastrophic storms, the S&P Insurance Select Industry Index rose 5% in a year when the overall market fell nearly 20%. Compared to that, Berkeley had a great year, rising 33.7%.
For the third quarter, revenue climbed 12% to $2.72 billion and net income fell 12% to $229 million from $261 million in the year-ago quarter. The drop is mainly due to Hurricane Ian.
Still, for the nine months ended Sept. 30, revenue jumped 18% to $8.2 billion and net profit jumped 37% to $999 million, from $728 million for the same period in 2021. WRB is expected to release its fourth quarter results by the end of this month.
In 2021, earnings per share nearly doubled, climbing 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.
According to Zacks, four trends are currently shaping the future of P&C insurers.
- The ability to implement price increases and charge higher premiums. Global commercial insurance prices rose 6% in the third quarter, marking the 20th consecutive quarter of price increases.
- The industry is seeing an increase in mergers and acquisitions as companies seek to gain market share.
- The industry is increasingly using technology to reduce costs, make it easier to file claims and speed up business operations.
- The latest trend is the increasing number of disasters, which can have a significant effect on underwriting profits. According to Swiss Re, many industry players have seen underwriting profitability plummet due to Hurricane Ian claims of between $50 billion and $65 billion.
In 2022, there were 14 severe weather events, according to Yale Climate Connections. Damage from Hurricane Ian could well exceed $100 billion, said insurance broker Gallagher Re, making it one of the five costliest weather disasters in global history.
“Better pricing, prudent underwriting and favorable reserve development will help weather the blow,” Zacks said.
Berkley saw net premiums earned climb 19.6%, driven by good rate increases across most product lines, coupled with new contracts, according to Value Line, adding that the company has a volume of high quality business. Net investment income also helped, rising 2% on the back of interest rate hikes by the Federal Reserve, which boosted fixed income yields.
Among the risks associated with the stock is the fact that some of the good news is already priced into stocks. It trades at a premium to book value. At 2.8 times book value, 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 pay a premium for owning the best insurers in the model range. For example, Everest RE is trading at 1.3 times book value.
All in all a good long term investment because they have compounded the book value. If it were to trade at 19 times this year’s earnings, it would be an $89 stock, 15 points higher than today. Then another 15% increase would take it to $102 in 2024.
“Finally, the interests of management are aligned with those of investors. CEO William Robert Berkley Jr. and his father, Chairman William Robert Berkley, are required to own stock equal to 10 times their base salary, while other named executives are required to own stock worth three times their annual salary. In total, officers and directors own 22.4% of the company they manage,” according to Grant’ Interest Rate Observer.