(By Mani) The next few quarters would be challenging for insurer W.R. Berkley Corp. (NYSE:WRB) as low interest rates continue to put downward pressure on property and casualty (P&C) results.
Investors were disappointed by the reporting of 6 percent renewal rate change in the second quarter compared with 6.5 percent reported one quarter prior.
The lower renewal rate does not necessarily take the company off track from its forecast of 8-9 percent renewal rate growth by year-end, CEO Bill Berkley has been dialing back his forecast for rate improvements in 2013.
Berkley recently guided 2013 renewal rate premium growth at 8-10 percent, down from May 15 forecast of 8-12 percent, also down from a May 8 outlook of 10-14 percent.
It would seem that Berkley's outlook is still quite positive, but it also seems like that optimism is experiencing a gradual decline in harmony with a sluggish global economic recovery
"Despite three quarters of rate increase presumably ahead of loss costs, 2Q12's loss ratio saw modest year-over-year deterioration. Without the significant margin improvements management is forecasting, we expect calendar-year combined ratio to continue to deteriorate," Deutsche Bank analyst Joshua Shanker wrote in a note to clients.
Meanwhile, despite rate increases in excess of loss cost trends over the past three quarters, evidence of improvement in the loss ratio has yet to appear.
The company believes normalized loss cost trends are rising at around 3.5-4 percent, and it believes the last three quarters have experienced rate increases in excess of loss cost trends. So far, no evidence of margin expansion is coming through in the numbers as second-quarter accident-year loss ratio, excluding catastrophes, deteriorated by 54 basis points.
In addition to an increasingly challenging investment environment, the company has already fully mined, if not over-mined, its legacy reserves for prior-year favorable reserve redundancies. This suggests that loss reserves at Berkley have the potential to be significantly deficient, and that is why the insurer has been vocal about the need for improvement in P&C rates.
"The absence of this source of earnings (and perhaps presence of net unfavorable reserve strengthening), we believe, will more than outweigh the underlying accident-year improvements," Shanker said.
As a result, Berkley's earnings are poised to deteriorate as the combination of a softer underwriting cycle concurrent with lower investment yields producing weaker returns on float hampers results.
"With combined ratios near and perhaps above 100%, any further increase in the loss cost trend is likely to result in underwriting losses," Shanker noted.