W.R. Berkley's Exposure to Cat Losses Continues to Bother

As a property and casualty (P&C) insurer, W.R. Berkley Corporation WRB is exposed to both natural and man-made catastrophe events. The company has also been incurring inclement weather-related losses over a considerable period of time. With the occurrence of Hurricanes Harvey, Irma, Maria and earthquakes in Mexico, the company anticipates its underwriting results to get hurt in the near term. To that end, it has given a catastrophe loss projection of about $110 million, translating to $72 million after-tax.

It is important to note that being a P&C insurer, W.R. Berkley cannot avoid the aftermath of such catastrophe events, which in turn poses a threat to weigh on the company’s underwriting profitability in the soon-to-be-reported quarter. Irrespective of catastrophe mitigation techniques deployed by the company, exposure to weather-oriented calamities inevitably makes its earnings volatile.

This apart, intense competition in the global reinsurance segment has resulted in downward pressure on rates for the near term, thus restricting growth. Therefore, the company anticipates the increasing competition to negatively impact reinsurance results in the short term, leading to an earnings decline and hurting the company’s overall performance in the process.

Additionally, the Zacks Rank #4 (Sell) P&C insurer’s unfavorable gross premiums trend has been a dampener over the past few years with the company not even expecting to bounce back anytime soon. The company has also been persistently experiencing rising expenses, which might hamper its operations and limit growth.

Southbound Estimates: The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 13.3% downward over the last 60 days. While the same for 2018 has slipped nearly 1.5% over the same time frame. This is reflected in the company’s Zacks Rank as well.

An Underperformer: Shares of W.R. Berkley have gained 1.2% year to date, significantly underperforming the industry’s 12.5% rally. We expect substantial catastrophe losses, declining gross premiums as well as unfavorable global reinsurance results to throw challenges at the company’s overall functioning.

Earnings ESP and Surprise History: The company is set to release third-quarter results on Oct 24, 2017. Our proven model does not conclusively show that the stock is likely to beat on earnings this time around. This is because it needs to have both a positive Earnings ESP and a favorable Zacks Rank #1, 2 or 3 for this to happen. But that is not the case here as W.R. Berkley currently has a Zacks Rank #4 that lowers the predictive power of ESP and an Earnings ESP  of 0.00%, which makes surprise prediction difficult. Also, the company has missed the Zacks Consensus Estimate in all the last four quarters.

Stocks to Consider

Some better-ranked stocks from the finance sector include Principal Financial Group, Inc. PFG, Cigna Corporation CI and Cincinnati Financial Corporation CINF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Principal Financial offers retirement, asset management plus insurance products and services to businesses, individuals and institutional clients worldwide. The company delivered positive surprises in all the last four quarters with an average beat of 7.26%.

Cigna Corporation offers insurance and health-related products and services in the United States and internationally. The company delivered positive surprises in all the trailing four quarters with an average beat of 9.98%.

Cincinnati Financial deals in property and casualty insurance business in the United States. The company delivered positive surprises in all the last four quarters with an average beat of 14.97%.

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