W.R. Berkley Nears Historical Price-To-Book High, Analyst Downgrades Stock On Overvaluation Concerns

BofA Securities analyst Joshua Shanker downgraded W.R. Berkley Corporation WRB from Buy to Neutral, raising the price forecast to $74 from $73.

The analyst suggests that Mitsui-Sumitomo’s plan to acquire a 15% stake in W.R. Berkley may not lead to a takeover soon, though it could be a long-term option.

The analyst mentions that W.R. Berkley is currently trading at 3.0 times its estimated book value for March 31, which is close to the highest point it’s ever reached, matching levels seen in April 2006 and November 2022. This trend of high price-to-book ratios is also observed in other large commercial property and casualty insurance companies, which are generally considered to be overvalued at the moment.

The high price-to-book ratio for W.R. Berkley is largely attributed to its strong return on equity, which is currently in the high teens, driving the elevated valuation despite the company not being as overvalued on a price-to-earnings basis.

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Shanker suggests that Berkley benefits from lower exposure to casualty volatility compared to its peer stocks, and although some bearish investors are concerned about potential inadequacies in loss reserves (with short covering possibly explaining the recent stock surge), they believe Berkley is not facing greater challenges regarding loss trends than the industry as a whole.

Shanker states that, in general, they view commercial P&C underwriters as overvalued.

The analyst notes that Berkley has better potential due to its higher return on equity, lower property risk, and the presence of a dedicated buyer in the market.

Despite this, Shanker sees limited upside for Berkley, which leads to a Neutral recommendation.

The analyst also mentions that some unique factors specific to Berkley’s stock prevent them from recommending an Underperform rating at the current stock price.

Price Action: WRB shares are trading lower by 1.41% to $70.16 at last check Tuesday.

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