The Long and Short
An attractive discount offering in P&C segment
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Property and casualty insurance company WR Berkley’s (WRB: Baa1/BBB+/BBB+) 2037 notes are offered at attractive levels relative to the rest of the 10-to-20-year segment, for investors that can hold non-index issues. The company has one of the more stable operating profiles in the peer group, due in large part to its diversified operations and commercial lines. The non-index eligible notes also have the highest coupon in WRB’s capital structure, and could be a tender offer target with attractive take-out terms. Management has not tendered for the issue before, but could be compelled to do so when new issue market conditions become more functional. The company has been an opportunistic issuer in the long-end of the curve over the past two years.
Graph 1. P&C/Reinsurance credits (BBB+ or higher ratings, 10- to 20-year maturities)
Source: Amherst Pierpont, Bloomberg/TRACE Indications
5MM+ WRB 6.25 02/15/37 @ +210/10-year; G+199; 5.87%; $103.64
Issuer: WR Berkley Corporation (WRB)
Amount Outstanding: $250 million (non-Index)
Senior Debt Rating: Baa1/BBB+/BBB+
WRB is one of the more stable BBB property and casualty (P&C) insurance underwriters in the segment with highly diversified operating subsidiaries, which helps mitigate earnings volatility relative to many of its peers. The company has over 50 operating subsidiaries and operates in over 60 countries. The use of reinsurance helps mitigate exposure to business lines with longer tail risk. WRB generates about 10% of total revenue from reinsurance lines of operation.
WRB has demonstrated consistent operating metrics over the past several years. The combined ratio, an all-in indicator of underwriting profitability, has remained very consistently in the low 90% range and even dipped into the high 80% range over the past two years, with an operating ratio consistently in the low-to-mid 80% range.
WRB is well capitalized for its rating category. Total statutory capital and surplus for all P&C operating companies was $7.6 billion as of the second quarter of 2022. The risk-based capital ratio was 362% as of year-end 2019 and has remained highly consistent over the preceding ten years. The rating agencies assign AA capital adequacy ratings to the credit.
WRB has a solid liquidity profile. The company has no senior debt maturities prior to the 2037s. WRB has no term loans or outstanding lines of credit. There is currently $1.3 billion in cash and equivalents on the balance sheet, plus a $300 million revolving credit facility through 2027, versus just over $3.0 billion in total debt obligations. Management has been opportunistically issuing longer-term debt to improve their overall maturity structure over the past few years. They issued long-term debt twice last year and once near the height of the global pandemic in 2020, which they later tapped.
The Company has a conservative investment portfolio. Total cash and investments as of year-end 2021 was $20.9 billion. Bonds rated below NAIC 1 or 2 now represent only 1.52% of all $11.7 billion of fixed income holdings as of year-end 2021. Total common stock increased to $3.3 billion last year but remains highly manageable, while mortgage loan and real estate holdings are relatively negligible.
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